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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
  SENIORS' ACCESS TO AFFORDABLE PRESCRIPTION DRUGS: MODELS FOR REFORM

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 16, 2000

                               __________

                           Serial No. 106-92

                               __________

            Printed for the use of the Committee on Commerce

                    ------------------------------  

                     U.S. GOVERNMENT PRINTING OFFICE
62-971 CC                    WASHINGTON : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan                 SHERROD BROWN, Ohio
CLIFF STEARNS, Florida               HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 PETER DEUTSCH, Florida
RICHARD BURR, North Carolina         BART STUPAK, Michigan
BRIAN P. BILBRAY, California         GENE GREEN, Texas
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia             THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma              LOIS CAPPS, California
  Vice Chairman                      RALPH M. HALL, Texas
RICK LAZIO, New York                 EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona             JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING,         (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Alecxih, Lisa Marie B., Vice President, The Lewin Group......   134
    Braun, Beatrice, Member, Board of Directors, AARP............    26
    Lewis, Rita H., Director, Osteoporosis Support Group of San 
      Diego, California..........................................    24
    McCall, Carol J., Executive Vice President, Managed Care, 
      Allscripts.................................................   144
    Moran, Donald W., President, The Moran Company...............   141
    Scanlon, William J., Director, Health Financing and Public 
      Health Issues, General Accounting Office...................   100
    Vladeck, Bruce C., Director, Institute for Medicare Practice, 
      Mount Sinai School of Medicine, and Senior Vice President 
      for Policy, Mount Sinai NYU Health.........................   127
    Washington, Bonnie, Director, Office of Legislation, Health 
      Care Financing Administration, accompanied by Jack Hoadley, 
      Director, Division of Health Financing Policy..............    94
    Young, Donald, Chief Operating Officer and Medical Director, 
      Health Insurance Association of America....................   148

                                 (iii)

  

  SENIORS' ACCESS TO AFFORDABLE PRESCRIPTION DRUGS: MODELS FOR REFORM

                              ----------                              

                      WEDNESDAY, FEBRUARY 16, 2000

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:24 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Upton, 
Greenwood, Burr, Bilbray, Ganske, Norwood, Coburn, Lazio, 
Cubin, Pickering, Bryant, Waxman, Pallone, Deutsch, Stupak, 
Green, Strickland, DeGette, Barrett, Hall, Eshoo, and Dingell 
(ex officio).
    Staff present: Carrie Gavora, majority professional staff; 
Tom Giles, majority counsel; John Manthei, majority counsel; 
Kristi Gillis, legislative clerk; Bridgett Taylor, minority 
professional staff; and Amy Droskoski, minority professional 
staff.
    Mr. Bilirakis. The hearing will come to order. The Chair 
wishes to announce that, with the exception of the chairman's 
and ranking member's opening statement, the others will be 
limited to 3 minutes in the interest of time. We have a long 
hearing scheduled.
    I now call to order this hearing on Seniors' Access to 
Affordable Prescription Drugs: Models for Reform. Today's 
hearing will provide an opportunity to delve deeper into the 
details of specific proposals to expand prescription drug 
coverage for Medicare beneficiaries. I believe every hearing is 
an opportunity for members to educate themselves, and the issue 
of prescription drug coverage certainly merits our time and 
attention.
    However, I feel strongly that we must act soon to advance 
legislation that can be enacted this year. As I have repeatedly 
said, I believe no beneficiary should have to choose between 
filling a prescription and buying groceries. At a minimum, we 
must take action to help individuals in greatest need today.
    As you know, I have introduced a bipartisan plan to improve 
prescription drug coverage for the poorest and sickest Medicare 
beneficiaries. The bill is not perfect, and I would not try to 
force this approach on any other member. After reviewing all of 
the proposals before us, however, I hope that we can reach a 
consensus this year on some plan to improve prescription drug 
coverage for Medicare beneficiaries particularly those in need.
    I am proud of the subcommittee's record of success in 
addressing difficult legislative issues on a bipartisan basis. 
And, given the charged political climate and the complexity of 
the prescription drug debate, the challenge before us is most 
certainly daunting.
    As we seek common ground, I noted with interest a provision 
in the President's budget proposal to set aside $35 billion in 
on-budget surplus money over 10 years for a policy that 
provides protections against catastrophic drug costs. In a 
similar vein, the bipartisan bill that I have introduced would 
establish a stop-loss protection for beneficiaries who have 
high annual drug costs. I hope this is an area where we can 
find agreement, and I look forward to hearing more about the 
administration's plans in this regard.
    Our first panel of witnesses will describe the perspective 
of senior citizens in this debate, and it includes a fellow 
Floridian, Dr. Beatrice Braun. Our second panel includes 
representatives from the Health Care Financing Administration 
and the General Accounting office, and our final panel includes 
several distinguished experts with a diverse range of 
experience in addressing these issues. I want to welcome each 
of our witnesses and thank them for taking the time to join us. 
I look forward to today's hearing and the opportunity to work 
together to advance legislation to help beneficiaries obtain 
the medicines they need.
    The Chair now recognizes Mr. Waxman.
    Mr. Waxman. Thank you very much, Mr. Chairman.
    This Congress needs to take action to provide prescription 
drug benefits under Medicare. We need to act to eliminate price 
discrimination for drugs for our seniors. These two simple 
actions are long overdue, and I hope today's hearing marks the 
first real step toward dealing with these needs.
    Sherrod Brown, who has been committed to securing a 
universal prescription drug benefit in Medicare, normally would 
be here today in his position as ranking member on this 
subcommittee, but he is in Ohio suffering from injuries from a 
serious automobile accident. I know we all wish him a speedy 
and full recovery, and I know he is anxious to be back and help 
pass prescription drugs legislation out of this committee.
    No one would design Medicare today without including a 
prescription drug benefit. It is as critical to good medical 
care today as hospital care or physician care was when Medicare 
was first enacted. The simple fact is that if people can't get 
the drugs they need, they don't have adequate health care 
coverage.
    We know that over one-third of Medicare beneficiaries have 
no drug coverage, and nearly 30 percent more have unreliable or 
very inadequate coverage. That is almost two-thirds that need 
help. Retiree coverage is shrinking or being eliminated, 
benefits are increasingly expensive and inadequate, and we know 
that all the trends show that this situation is only going to 
get worse.
    Further, we know that seniors out there trying to purchase 
their prescription drugs on their own face tremendous price 
discrimination. They pay more for their drugs, frequently twice 
as much or even more for their drugs than the government or 
other favored customers of the drug companies. They are at the 
stage of their lives when they have more health problems and 
chronic illnesses. They need and use drugs more than any other 
part of the population, and yet they have the hardest time 
getting coverage, and when they purchase out of pocket, they 
pay the highest prices.
    Medigap coverage is no answer. Any policy with drug 
coverage becomes an extremely expensive policy. Not only is the 
drug coverage itself expensive, but the adverse selection that 
occurs runs up the costs overall. So people pay very high 
premiums that not uncommonly are barely equivalent to the 
amount of drug coverage that the policy supposedly provides. In 
some cases, seniors find they are paying more in increased 
premiums than the drug coverage is worth.
    And this isn't simply a problem for the low income. More 
than half of current Medicare beneficiaries without drug 
coverage have incomes above 150 percent of poverty. If you are 
a widow living on Social Security, if you have several 
different chronic conditions, if you need prescriptions 
regularly, you can't afford your drugs. It is that simple.
    All this clearly underlines the need for Medicare coverage 
of prescription drugs for all of the program's beneficiaries. 
We wouldn't pay for hospital care only for the poor. We 
shouldn't think of limiting drug coverage in that way, either.
    To me, the crisis that faces Medicare today is not its 
solvency. We know that the Trust Fund is solvent for at least 
15 more years. The crisis in Medicare is that it doesn't 
provide coverage for prescription drugs when that coverage is 
so obviously needed.
    Do we need to work long term to adjust Medicare and its 
financing so that we are ready to care for the baby boomers? Of 
course we do. But this is a program that is too vital for too 
many to take hasty or ill-considered actions that are neither 
well understood or supported by the public. More fundamental 
changes are a long term project.
    But however we change the program in the future, we know 
that it will have to provide prescription drugs if it is going 
to meet the health care needs of our seniors and disabled 
citizens. It will never be easier or cheaper to do than it is 
now. Let's get on with providing coverage in the program and 
ending price discrimination for seniors. I hope our witnesses 
today will help us take the steps to achieve these goals this 
year. This Congress could have no better legacy.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Greenwood?
    Mr. Greenwood. Thank you, Mr. Chairman.
    As Mr. Waxman has just said, we are in a crisis. We have 
wasted a lot of time trying to resolve this crisis. There has 
never been a prescription drug benefit for Medicare. We had an 
opportunity about a year ago, when the bipartisan Breaux-Thomas 
Commission made recommendations that would have enabled us to 
structurally reform Medicare in a way that would have made it 
quite convenient to add the prescription drug benefit, and 
unfortunately it was the administration that decided to sink 
that bipartisan agreement.
    So here we are today in a position where, as we know and it 
has been said, 35 percent at least of America's seniors do not 
have access to prescription drug benefits at all. And in this 
day and age, if you don't have access to the new marvels of the 
pharmaceutical industry and the new marvels of the biological 
industry, you don't have good health care.
    As we look at this problem today, one of the things that we 
should focus on is illustrated by the first chart, which has 
just been covered up by the second chart. Now, the first chart 
indicates that the place we need to focus our attention, 
obviously, is on the lowest income, the 35 percent of seniors 
without prescription drug coverage. If you look at the far 
right, only 5 percent of the wealthiest American retirees, 5 
percent of those over $50,000 per year of income are without 
the benefit, and that escalates as you go, in inverse 
proportion to income, as you go down to those below $10,000 
where you have 37 percent of the seniors without the benefit.
    This will get worse. Actually, that is--okay, that will do. 
This problem is going to get worse for several reasons. No. 1, 
as we all know, the percentage of those of us who will be above 
the age of 65 by 2030 will go from 13 percent last year to 20 
percent, and the reliance on medication, for a lot of very good 
reasons and to the benefit of the retirees, will go from 33 
percent of the population of retirees using medication of some 
kind to 51 percent on a regular basis.
    Another reason why this crisis will worsen if we don't 
resolve it soon is because the costs of pharmaceuticals in 
total are increasing rapidly in comparison to a generally 
declining Consumer Price Index. If you look at 1993, the 
average increase in pharmaceuticals was about 8.2 percent that 
year against a 2 percent CPI. And while the CPI is still 2.7 
percent in 1999, the increase, the 1-year increase in the cost 
of pharmaceuticals total was 18.5 percent, double digits, and 
that trend is probably going to continue in that direction.
    Finally, what is important I think to look at is that 
simple approaches, oversimplified approaches that would simply 
try to freeze the prices of pharmaceuticals, won't do the job 
because the annual increase in the prices of pharmaceutical 
products on the market is not the culprit. If you look at that 
chart, they increased 8.4 percent in 1990. In 1998 there was 
only 3.2 percent. That is the purple portion of those bar 
graphs on the bottom. So the annual increase in the price of 
products on the market is relatively de minimis.
    What is happening is that the utilization, the volume mix, 
the likelihood that the retiree is on one or more medications, 
is increasing, and the new products coming onto the market that 
have cost a half a billion dollars----
    Mr. Bilirakis. Would the gentleman finish up?
    Mr. Greenwood. [continuing] is the major cause of the 
price, the cost increase. So we should avoid simple approaches 
to this problem, but we should get on with it, and this side of 
the aisle is prepared to do that.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    The gentlelady from Colorado.
    Ms. DeGette. Thank you, Mr. Chairman, and thank you for 
holding this hearing on Medicare prescription drug coverage.
    As we have heard already from my colleagues, our seniors 
are in crisis over prescription drug issues. Almost two-thirds 
of them have limited or no coverage whatsoever, and as we just 
heard, the issue is not just one for coverage but also for 
addressing rising costs. In fact, the average annual 
prescription drug costs for seniors are estimated to increase 
from $942 in 1999 to $2,353 in 2011. For seniors, who often 
live on a fixed income, they are at considerable risk to such 
extraordinary cost inflation, and they desperately need a 
comprehensive Medicare prescription drug benefit.
    Some people say we should just build on the current system. 
However, access to prescription drugs cannot be just based on 
factors as where you happen to retire, as is so often the case 
today.
    For example, just among the 14 to 15 percent of Medicare 
beneficiaries that are enrolled in HMOs, some Medicare+Choice 
HMOs offer comprehensive coverage; others have adopted limited 
coverage with, as Bruce Vladeck points out, a bewildering 
variety of formulary restrictions, benefit caps, and other 
techniques to try to manage their pharmaceutical costs which 
significantly complicate the process of choice for 
beneficiaries, and an increasing number of plans are completely 
dropping drug coverage.
    The options for the other 85 percent of Medicare 
beneficiaries are further complicated by the perverse 
incentives of prescription drug coverage in inpatient settings 
but lack of coverage in outpatient settings, interactions with 
third party coverage and Medicaid.
    All of this cries out for adoption of a standard Medicare 
pharmaceutical benefit that would significantly simplify the 
choice process. Moreover, with a standard prescription drug 
benefit, as is the case among private employers, the Medicaid 
program and the VA, Medicare could for the first time assist 
seniors with the spiraling costs of prescription drugs by 
bargaining for volume discounts on their behalf. Without it, 
according to a study I did of prescription drug prices in my 
district, seniors are going to pay, at least in the First 
Congressional District of Colorado, on average 121 percent more 
for prescription drugs than favored customers like large 
insurers, HMOs and the VA.
    Mr. Chairman, to address both the lack of prescription drug 
coverage and rapidly rising costs, this Congress has the 
responsibility to act this year, and I am glad that we all seem 
to recognize the problem on a bipartisan basis. The devil is 
always in the details, and I look forward, along with my 
colleagues, to hearing the testimony that we will hear today.
    Thank you, and I yield back.
    Mr. Bilirakis. I thank the gentlelady.
    Dr. Coburn?
    Mr. Coburn. Thank you, Mr. Chairman, for holding this 
hearing. I think there are a couple of things that we need to 
talk about when it comes to Medicare prescription drugs, and I 
do have the experience of having my seniors decide over a pill 
versus a meal, and I also know that about one out of every 
three prescriptions I write them, they don't fill because they 
don't have the money to do it.
    As we look at this, you know, everybody says we are in 
surplus, but it is important to keep in mind that the surplus 
last year, the $1 billion true surplus, came out of the 
Medicare Part A Trust Fund. The $23 billion that is projected 
for surplus for this year is coming out of the Medicare Part A 
Trust Fund. It is excess payments into Medicare. The $22 
billion for the year 2001 is coming from the Medicare Part A 
Trust Fund.
    So, as we look at the integrity of the Medicare system, it 
is important that we understand that the projections that Mr. 
Waxman gave that it will be fine for 15 years, it is not going 
to be fine for 15 years, because we are going to spend the 
money, and the money is going to get spent on other things. So 
the first thing we need to do, if we are going to establish a 
drug program for Medicare, is to stop taking Medicare Part A 
Trust Fund money.
    The second thing that I think we need to do is to look at 
what the real problems are in the drug industry. One of the 
greatest mistakes this Congress did was give drug companies the 
right to advertise on television. If you look at the 18.5 
percent increase in the cost of drugs for 1999, ask how much 
that would have been decreased if $5 billion hadn't been spent 
on television advertising for drugs that are prescription 
anyway. Last week an associate of mine saw a television ad for 
an IV antibiotic, on television.
    Now, who is paying the price for that? Who is paying for 
that? Medicare seniors are paying the price because we have 
decided to allow drug companies to advertise prescription drugs 
on TV, of which half the doctors, when they get asked to do 
that, immediately give something other than that because they 
are so abhorrent that the TV should be telling a patient what 
they need when they don't give full information on it.
    The second thing that I think needs to be looked at is the 
lack of competition in the drug industry. There is no 
competition in the drug industry. We like to say there is, but 
there is not.
    No. 3 is the fact that the American consumer is subsidizing 
drugs in Canada and Mexico, that if you look at the prices and 
we ignore the NAFTA system for allowing drugs to move across 
borders, in fact we are subsidizing drugs to a great extent 
throughout the country.
    The fourth thing that I think needs to be looked at is the 
lack of utilization of appropriate generics, and the failure of 
the FDA and the administration to approve an increasing number 
of generic drugs, and the failure of the medical profession to 
utilize generic drugs in their efforts to try to lower the 
costs. Real care of patients is determined on whether or not 
you identify what is wrong with them, give them something that 
they are going to use, that will in fact impact. If you give 
somebody a prescription that costs $100 and they can't fill it, 
you haven't helped them at all.
    Mr. Bilirakis. Please summarize.
    Mr. Coburn. I will. So what should be the things that we 
look at as we look for prescription drug relief? Prolong the 
life of Medicare, that is the first thing we ought to do. The 
second thing we ought to do is make sure whatever we do 
increases competition. No. 3, the third thing is increase 
access. And the fourth thing, what can we do to lower costs?
    And I thank the chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Burr, to inquire? Do you have an opening statement?
    Mr. Burr. Thank you, Mr. Chairman.
    So many numbers, so many differences in the numbers. Here 
is one number that I don't think anybody will dispute: $11,727 
is the income of an individual at 150 percent of poverty in the 
United States of America. The question you have to ask yourself 
is, how long will we allow that individual to make a decision 
as it relates to where that $11,000 is spent, and for us, the 
safety net, not to provide the drug access and availability for 
them.
    I don't think that the argument in this committee will be 
over whether there is a need for the Federal Government to be 
involved. Until Mr. Dingell came in, I could safely say nobody 
on the committee was here when we passed Medicare into law. But 
clearly, had drug benefits been part of the standard policy at 
that time, I think that prescription drugs would have been part 
of Medicare and should be today.
    The GAO will testify shortly that it should be done in 
conjunction with comprehensive reform of Medicare. You have 
already heard some members say we don't need to do that now. 
One of the reasons that we are in this position is that we 
haven't been bold enough to tackle tough things in the past as 
it relates to health care, and especially as it relates to 
seniors' health care.
    I personally believe that it is time that they have the 
best delivery system for health care, and that is not our 
current Medicare system. But we can add the drug benefit in the 
right way, a way that makes it comprehensive and universal so 
that all seniors can have an option of buying in and some 
seniors being supplied the subsidy, and it fits in the model of 
where we go for Medicare in the future, then I am all for doing 
it with this very important first step.
    Mr. Chairman, I look forward to the witnesses. I thank them 
for their testimony in advance. I look forward to this 
committee producing a product that some in this town say we 
can't do, and in fact this Congress passing it and this 
President signing it into law.
    I yield back.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Dingell, to inquire?
    Mr. Dingell. Mr. Chairman, thank you. First, I commend you 
for the hearing today. Second of all, I observe this is a most 
important subject and one on which we should provide 
leadership, and again I commend you.
    I ask unanimous consent that my full statement be inserted 
into the record, and I be permitted to summarize.
    Mr. Bilirakis. Without objection, the opening statement of 
all members of the panel will be made a part of the record.
    Mr. Dingell. Mr. Chairman, one of the great needs of 
Medicare, which was originally introduced by my dad, and which 
I sat in the chair when it was passed, is to see that we give 
our senior citizens coverage for prescription drugs, because 
many of them are compelled to go to a doctor, to receive the 
friendly bedside manner, but not to receive the thing which is 
absolutely essential to the success of the treatment, and that 
is prescription pharmaceuticals to address the basic medical 
need which they confront.
    More and more costs are being asserted against them. 
Medicare beneficiaries have only limited coverage for insurance 
against the costs of prescription pharmaceuticals, and indeed 
many of them are suffering significant difficulties, including 
hard choices between prescription pharmaceuticals which they 
need and, unfortunately, food, lodging and other things which 
happen to be equally important to them.
    The inclusion of prescription drugs in the Medicare program 
does not have to wait for system-wide reform. It can be dealt 
with through incremental change, and if you have observed the 
difficulties that we always confront when you try to make a 
massive, sweeping change, the end result is, nothing happens. 
My suggestion is that we then get down to the business of 
addressing this problem in a simple, easy change which we can 
make which will achieve broad support, and which is really not 
subject to any criticism.
    There are two discharge petitions now pending, one on the 
Allen bill, H.R. 664, and one on the Stark-Dingell bill, H.R. 
1495. The Allen bill will provide access to prescription drugs 
at discounted prices for seniors, making them more affordable. 
I will note that not infrequently drugs of the same exact 
chemical prescription or substance are made available to 
animals at about half the cost to which they are made available 
to senior citizens. Clearly there is some imbalance here that 
needs to be addressed, and I would suggest that we can and 
should do so at an early time. The Stark-Dingell bill would add 
a universal affordable prescription drug benefit to the 
Medicare program.
    The petitions will seek to have an open rule so that we can 
full and fair consideration of the bills on the House floor. I 
prefer to follow, of course, the regular order, and it is for 
that reason I am delighted, Mr. Chairman, that you are having 
this hearing, because this enables us then to commence moving 
forward on both of these pieces of legislation and not to 
confront the kind of problem that the committee and the 
Congress confronted when we had to move the Patients' Bill of 
Rights, which was so ably sponsored by my dear friend, Mr. 
Norwood, with my modest assistance.
    Mr. Bilirakis. If you would summarize, please.
    Mr. Dingell. Having made that observation, I look forward 
to a successful consideration of this matter, a harmonious and 
bipartisan working together to achieve a solution to a problem 
which the senior citizens find most troublesome. And I would 
note simply to the committee, the people want it, the country 
needs it, it is good for us all to resolve this question, we 
can do so easily, and I am delighted to see you embarked upon 
the beginning of this undertaking. And I know that the 
committee, under your leadership, will move forward, and I look 
forward to being a modest participant.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Medicare is one of the most successful social programs of our time. 
In 1965, when Medicare was created, about half of America's seniors did 
not have health insurance. Almost 1 in 3 seniors lived in poverty, and 
were forced to choose between food, rent, or needed care.
    Today, as a result of Medicare, seniors can get affordable health 
care. The poverty rate of the elderly has been cut in half. Americans 
are living longer and more prosperous lives.
    However, since the program's enactment, there have been many 
advances in medicine. Most notably, prescription medications have been 
a critically important form of treatment, helping to cure disease, to 
prevent relapse of illness or injury, and to prevent the onset of 
disease or disability.
    But, most seniors find themselves paying more and more out of 
pocket for the drugs they need to stay well. Some Medicare 
beneficiaries have insurance coverage to help with these costs, but 
this coverage is unstable and declining. Medicare beneficiaries today 
face problems with drug coverage similar to the health insurance 
coverage problems faced in 1965. Many are presented with a stark choice 
between food, rent, or prescription drugs. And of those with coverage, 
about half are without full-year coverage.
    To fulfill the promises made to seniors in 1965, we need to 
modernize the Medicare benefits package and make prescription drugs an 
integral part of Medicare. What this means is that prescription drugs 
should be available to all Medicare beneficiaries through the Medicare 
program, whether in fee-for-service or managed care. The benefit should 
be defined so that all Medicare beneficiaries are guaranteed dependable 
coverage, no matter where they live or how they get their coverage. 
Additionally, the benefit should be structured to encourage 
participation, and it should have protections for the low-income 
beneficiaries. Recognizing the important role that employers play in 
providing retiree benefits, we should also encourage employers to 
continue providing these benefits as well.
    However, the inclusion of prescription drugs in the Medicare 
program should not have to wait for system-wide reform. We do need to 
explore ways that the Medicare program can be modernized and encouraged 
to work more efficiently, but given the number of people affected by 
system-wide reform, we should proceed with caution, and certainly 
accept no proposal that would eliminate the universal guarantee and 
social insurance nature of the Medicare program. We should be seeking 
to fulfill the promises made to seniors in 1965, not break them.
    We are eager to get down to the business of providing prescription 
drug coverage in Medicare and making needed medicines more affordable 
for seniors this year. Today, we Democrats introduced two discharge 
petitions: one on the Allen Bill, H.R. 664, and one on the Stark-
Dingell bill, H.R. 1495. The Allen bill would provide access to 
prescription drugs at discounted prices for seniors, making them more 
affordable. The Stark-Dingell bill would add a universal, affordable 
prescription drug benefit to the Medicare program. These petitions seek 
to discharge an open rule, so that we can have full and fair 
consideration of these bills on the House floor. While I prefer to 
follow regular order, both of these bills were introduced almost a year 
ago, but we have not seen any action to date. Seniors have already been 
waiting too long for help.
    I am pleased to see that this Committee is exploring the issues 
surrounding providing prescription drug coverage in Medicare. I look 
forward to hearing from today's witnesses, and I hope that we will 
expeditiously proceed to markup on a proposal that would guarantee all 
Medicare beneficiaries affordable, accessible, and comprehensive 
coverage of prescription drugs. But if this Committee fails to act, 
each Member can do his or her part by signing the discharge petitions 
so that seniors are not kept waiting.

    Mr. Bilirakis. And I thank the gentleman.
    Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman.
    Access to prescription drugs for Medicare beneficiaries is 
probably the most critical issue facing lawmakers this year. 
The current Medicare benefit package does not cover most 
prescription drugs, and I have heard from many seniors in my 
district who struggle to afford their medicines every month.
    Today none of us would devise a medical insurance program 
for seniors that didn't include coverage for prescription 
drugs, but the current Medicare program was created in 1965, 
and back then drugs didn't play as vital a role in keeping 
people healthy. A lot has changed in health care since then. 
Conditions which used to require hospitalization can now be 
treated with new medications. These modern medicines help keep 
people out of the hospital, out of nursing homes, and help 
people remain active, productive members of society.
    Over the past 35 years medicine has changed, but Medicare 
has not been able to keep up with those innovations because of 
the way it is designed and its overwhelming complexity. The 
program continues to be plagued by financial problems. Frankly, 
we owe beneficiaries a better Medicare, one that can adapt and 
adjust to changes in the health care system. We should not lose 
sight of the long term goal as we work to provide new, 
affordable options for prescription drug coverage for seniors.
    I want all beneficiaries to have access to affordable 
prescription drugs. I am interested to hear from our witnesses 
today on how they think they can provide better access. I know 
someone is here from HCFA to talk about the administration's 
plan, and I am glad, because I have concerns about that 
proposal. To be honest, after looking at the President's 
numbers, I am not sure many seniors will get much of a benefit 
from his plan.
    For example, the average senior without any form of drug 
coverage is paying approximately $468 in total drug costs 
annually, according to the latest data from the Medicare 
current beneficiaries survey from HCFA. Under the 
administration's plan, a beneficiary would pay $302 a year in 
premium expenses and half the cost of the prescriptions that 
they purchase, so $302, plus half of the $465 on average is 
$234, equals about $536 total that a person would pay under the 
President's plan. This senior would be paying $68 more under 
his plan.
    I may be crazy here, but I think we can probably do better 
than that. These are the facts and the figures that we have to 
look at closely today, and I am confident that we can find a 
better market-based solution that will help the seniors than 
the President has suggested so far.
    I want to thank the witnesses today in advance who have 
taken their time to be here, and I look forward to your 
testimony. Mr. Chairman, I yield back the balance of my time.
    Mr. Bilirakis. And I thank the gentleman for that.
    Mr. Pallone?
    Mr. Pallone. Thank you, Mr. Chairman, and I want to thank 
you for holding this hearing.
    The lack of an affordable prescription drug benefit is, 
without question, the biggest problem with the Medicare program 
today. The problem can't be corrected piecemeal by simply 
devising a plan to cover the poorest seniors. A comprehensive, 
affordable drug benefit should be available to all seniors 
regardless of income. Over 50 percent of Medicare beneficiaries 
without drug coverage are actually middle class seniors.
    It is not clear to me whether the Republican leadership is 
prepared to move away from their previous plan to cover only 
the one-third of Medicare beneficiaries who lack any 
prescription drug coverage at all. The Speaker, I understand, 
has appointed a partisan task force to study this issue, and I 
hope this is not a mere diversionary tactic to stall any action 
by this committee to move quickly on a comprehensive drug 
benefit that includes putting an end to the price 
discrimination seniors face when purchasing pharmaceuticals.
    That price discrimination issue has been well documented by 
Mr. Waxman and his Government Reform Committee and a number of 
consumer groups. The Waxman committee report shows that seniors 
pay almost twice as much for their prescription drugs than do 
the pharmaceutical industry's most favored customers. Families, 
U.S.A., to cite just one example from outside the government, 
found that the prices of the 50 drugs used most frequently by 
seniors have risen at approximately two times the rate of 
inflation over the past 5 years, and four times the rate of 
inflation over the last year.
    When it comes to an examination of who has taken the lead 
in trying to fix this problem, I think the record is clear. 
Notwithstanding Chairman Bilirakis' bill, the Republicans have 
done little on this issue. Democrats, on the other hand, have 
been on the House floor day after day since the 106th Congress 
began, pushing for consideration of legislative solutions such 
as those that have been offered by Congressman Tom Allen and 
Mr. Waxman and by Congressman Pete Stark and Mr. Dingell. All 
day today, in fact, Democrats will be signing discharge 
petitions on both of these bills in an effort to overcome the 
GOP's opposition to moving this issue forward quickly.
    Both the Stark and Allen plans would increase the 
negotiating power of those seeking to provide a Medicare drug 
benefit, allowing pharmaceuticals to be purchased at cheaper 
prices and passing those savings on to all interested seniors. 
The President's plan also proposes to establish a comprehensive 
benefit and provide pharmaceuticals to seniors who need them at 
discounted prices, and I strongly support his proposal. On the 
other hand, I don't know of any Republican proposals or 
expressions of support for confronting the issue of 
pharmaceutical price discrimination.
    Mr. Chairman, before closing, I did want to express my view 
that I do think it is important to bring in the pharmaceutical 
companies in our efforts to pass the Medicare prescription drug 
benefit. The willingness of the drug companies to drop their 
initial opposition to a benefit, and specifically to the 
President's proposal, is refreshing. I was contacted by some of 
New Jersey's pharmaceutical executives in particular last 
month, who expressed their willingness to sit down and help 
come up with a plan.
    In an effort to show bipartisanship and support for a plan 
that the industry did not oppose, I, along with my colleague 
from New Jersey, Marge Roukema, sponsored the House version of 
the SPICE Act last year, and I believe----
    Mr. Bilirakis. Please summarize.
    Mr. Pallone. [continuing] and I believe that that also can 
move the prescription drug benefit debate forward.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Dr. Norwood?
    Mr. Norwood. Thank you very much, Mr. Chairman.
    This is of course a very important hearing, but just on a 
little lighter note, I want to say to my dear friend John 
Dingell, who can be described in many wonderful ways, 
``modest'' is probably not one of the words that should be in 
his vocabulary.
    We need to begin this process of matching a real and 
correct legislative solution to the rhetorical problem that 
dominates the political arena, and we are not going to get 
there, my friend Mr. Pallone, by making this a partisan issue, 
and you know that. My observation is that if you want to be 
real partisan, that is a certain way of how not to get the job 
done.
    The question is, how do we increase seniors' access to 
affordable prescription drugs? I would like to begin by noting 
a very simple truth, a fact: The long term health of the 
Medicare program is far from settled. When we first took up 
Medicare reform at least 5 years ago, bankruptcy was imminent, 
in fact this year. In 1997 we made some very hard choices in 
changing the way we reimburse providers, and it did extend the 
solvency of Medicare 15 years.
    In fact, we did go too far, which is why we had to pass a 
bill making some technical refinements last year, and I am 
proud we recognized we went too far and made the correction. 
But we all know the problems in Medicare are far from being 
solved. I am sure we have all been visited by our hospitals. 
They are far from comfortable with their Medicare 
reimbursement, for example.
    Medicare needs a long term solution, and we should be 
spending more talking about ways to make fundamental changes to 
make Medicare solvent for our children and our grandchildren. 
Yet, here we are talking about adding a massive, costly new 
benefit to Medicare.
    Now, I am not trying to argue that the cost of prescription 
drugs for seniors is not a very, very real issue. It is a very 
real issue for those seniors who have no drug coverage, I can 
tell you that. The question for me is, should we be trying to 
create a new drug benefit for all seniors, or should we be 
trying to find a way to get help in purchasing prescription 
drugs to those seniors who actually need the help? I like Mr. 
Perot, but I am not interested in helping him with his drugs, 
for example.
    Mr. Chairman, the President's proposal is unacceptable to 
me. It is like using a backhoe to weed your garden. When the 
long term solvency of Medicare is in question, adding $168 
billion in a government-run universal benefit just doesn't 
quite make sense to me. It is like trying to solve the problem 
of a company going bankrupt, and the solution, the CEO says, is 
``Let's go see how much more money we can spend. Maybe that 
will solve the problem.'' I believe that when we fully examine 
the consequences of such a proposal, it could have on the 
pharmaceutical market, for example, and we had better examine 
that----
    Mr. Bilirakis. Please summarize.
    Mr. Norwood. [continuing] particularly in their research, 
we will probably reject the President's proposal.
    Mr. Chairman, I would like to add my remaining remarks to 
the record, and simply say I would like to associate my final 
comments with Dr. Coburn. I think he is exactly correct when we 
talk about the use of generic drugs. That is an important part 
of the solution. I think he is precisely correct when he said--
--
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Norwood. [continuing] we made a mistake allowing the 
drug, the pharmaceutical companies, to advertise on TV, and I 
hope we will deal with that. And that is all, Mr. Chairman.
    [The prepared statement of Hon. Charlie Norwood follows:]
    Prepared Statement of Hon. Charlie Norwood, a Representative in 
                   Congress from the State of Georgia
    Thank you, Mr. Chairman. This is a very important hearing today, 
because we need to begin the process of matching a real legislative 
solution to the rhetorical problem that dominates the political arena. 
How do we increase seniors' access to affordable prescription drugs?
    I would like to begin by noting a very simple fact--the long-term 
health of the Medicare program is far from settled. When we first took 
up Medicare reform five years ago, bankruptcy was imminent. In 1997, we 
made some very hard choices in changing the way we reimburse providers 
and extended the solvency of Medicare for 15 years. In fact, we 
probably went too far in some areas--which is why we had to pass a bill 
making some technical refinements last year.
    But we all know the problems in Medicare are far from solved. I am 
sure we have all been visited by our hospitals. They are far from 
comfortable with their Medicare reimbursement. Medicare needs a long-
term solution, and we should be spending more time talking about ways 
to make fundamental changes to make Medicare solvent for my children 
and grandchildren.
    Yet here we are talking about adding a massive, costly new benefit 
to Medicare. I am not trying to argue that the cost of prescription 
drugs for seniors is not a real issue. It is a very real issue for 
those seniors who have no drug coverage whatsoever. The question for me 
is . . . should we be trying to create a new drug benefit for all 
seniors or should we be trying to find a way to get help in purchasing 
prescription drugs to those seniors who need help?
    Mr. Chairman, the President's proposal is unacceptable. It is like 
using a backhoe to weed your garden. When the long-term solvency of 
Medicare is in question, adding a 168 billion dollar, government-run, 
universal benefit just doesn't make sense. I believe that when we fully 
examine the consequences such a proposal would have on the 
pharmaceutical market--particularly in the area of research--we will 
reject the President's proposal.
    Mr. Chairman, I believe we need to focus on the real problem 
through a targeted approach. We need to be looking at solutions that 
benefit those who have no drug benefit and need help to afford the cost 
of prescription drugs. We need to be careful not to do anything that 
might negatively affect pharmaceutical research. We need to be careful 
not to do anything that might make the job of long-term Medicare reform 
more difficult.
    If we can find a common ground between us on what is necessary to 
help seniors in need, we can pass useful legislation. If we are going 
to turn this into a political football, then we are wasting our time 
and not doing seniors any good. Mr. Chairman, I look forward to working 
with you to make a difference for seniors in need.

    Mr. Bilirakis. The gentleman from Michigan.
    Mr. Stupak. Thank you, Mr. Chairman. I apologize for being 
a little bit late because I was down in line signing the 
discharge petitions. I think they are critically important. I 
think we have to do them. Since 1998 I have been on the Stark-
Waxman bill--excuse me, Stark-Dingell bill and the Allen-Waxman 
bill. And, you know, the discharge petitions just say let's 
have a full, honest, open debate on this issue. But I am 
pleased that at least the debate can start here, Mr. Chairman, 
and I thank you for holding a hearing.
    You know, like I said, it has been 2 years, 1998, since we 
brought forth those bills. In those 2 years, what I have found 
is, seniors across my district, like the 88-year-old widow up 
in Sheboygan, Michigan, whose only income is $814 from Social 
Security. Her monthly prescription drugs are $446. Fifty-four 
percent of her income goes just to try to pay for her 
prescription drug coverage. And no matter where I go in my 
district, from Lawrence to Traverse City to Ironwood, seniors 
are spending anywhere from 25 percent to 50 percent of their 
income just for their prescription drugs, and we have examples 
of letters that go on and on. And then you see reports where, 
if you are a veterinarian, you get the same medicine for your 
animal for half the costs that seniors are paying. There is 
something wrong with it.
    So, while we are not trying to politicize the issue, we are 
certainly going to get the political pressure up here to get 
this issue before us. A drug benefit is very, very necessary.
    I noticed over the break that the drug companies were 
running these ads about accessibility to drugs. It is not 
accessibility. It is called affordability. How can you have 
seniors who have prescription drug coverage pay 50 percent less 
than a senior who is standing in line at the pharmaceutical 
companies, I mean at the drug store, paying half of what they 
have to pay just because they don't have any kind of drug 
benefit coverage?
    So I think we should move these bills, being the Allen bill 
and the Stark bill, and I hope we would do it quickly. There is 
no excuse for it. I think what we should strive for in these 
hearings is, how can we provide universal prescription drug 
coverage for everybody, under Medicare or any other kind of 
program you want to advise, and also to end the drug price 
discrimination by the pharmaceutical industry, not only amongst 
our seniors, but when you are dealing with animals and seniors.
    And I live on the Canadian border. We can go across to 
Canada, the same drug, the same everything, half to 60 percent 
less of what you would pay in the United States, and they are 
all manufactured here in the United States. No reason for it, 
Mr. Chairman.
    So I look forward to this hearing. Thank you for having it. 
I yield back the balance of my time.
    Mr. Bilirakis. I thank the gentleman.
    Dr. Ganske?
    Mr. Ganske. Thank you, Mr. Chairman.
    I think it is true that there are some Medicare 
beneficiaries, for instance widows who exist solely on their 
Social Security, and out of that Social Security is taken 
Medicare premiums, and they are faced with the situation where 
on some months they have to decide between different types of 
medications that they can have refilled, or even between 
medications and other essentials of life such as heating and 
food. So I think there is no question that we should do 
something, especially to target the neediest of Medicare 
beneficiaries, in regards to the high cost of prescription 
drugs.
    You know, Mr. Chairman, Congress has dealt with this issue 
before, and I think it would behoove every Member of Congress, 
not just this committee, to go back over what Congress did in 
1988 and look at this issue. Now, I know there are some members 
on the panel here who were here at that time, but CRS has a 
report for Congress on the Medicare Catastrophic Coverage Act 
of 1988. And I want to just review a little bit of what went 
on, and so I am going to quote rather liberally from an 
editorial that was written by Dan Rostenkowski for the January 
17 Wall Street Journal, and it goes something like this:
    ``Given Ronald Reagan's conservative reputation, many 
people are surprised to hear that he enthusiastically signed 
the largest Medicare expansion in history. That 1988 
legislation limited the costs of hospitalization and partially 
paid for prescription drugs. The plan was wildly popular and it 
passed with overwhelming bipartisan support, 328 to 72 in the 
House.''
    ``Today it is equally surprising to hear that the following 
year George Bush signed legislation repealing that expansion. 
The reversal was by far the largest cut in Medicare benefits in 
history, but the repeal legislation passed the House by a 360 
to 66 vote, the most sudden and drastic reversal in my 36 years 
in Congress,'' said Mr. Rostenkowski.
    He goes on. He says, ``The problem was, and still is, a 
lack of money, the result of senior citizens' reticence to pay 
more. Debating the wisdom of the Reagan era expansion plan, 
Senator Alan Simpson said at the time, `It is a social 
experiment. It's called pay for what you get.' ''
    Rostenkowski said, ``The plan was financed by a premium 
increase for all Medicare beneficiaries, supplemented by extra 
payments from more affluent recipients.'' Rostenkowski says, 
``In hindsight, we made several mistakes. The first was to 
break precedent and ask that the group receiving the benefits 
actually pay for them. The second involved timing. We adopted a 
principle universally accepted in the private insurance 
industry: People pay premiums today for benefits they receive 
tomorrow. Apparently, the voters didn't agree with these market 
principles.''
    ``Television critics' archives preserve the image of 
unhappy Chicago senior citizens surrounding my car''--this is 
Rostenkowski----
    Mr. Bilirakis. Please sum up, doctor.
    Mr. Ganske. [continuing] ``when I visited a decade ago to 
explain why I thought Medicare expansion was a good deal.''
    Then if you look at what went on, you will see that the 
initial projections--and this is from the Washington Post, 
August 1989, so it is before the provision went into effect--
the initial cost estimates for the prescription benefit at that 
time for this program was $37 billion, but within a few months 
they had raised it to $42 billion and then $45 billion.
    And my point is this, Mr. Chairman. When we look at this 
problem, we have no idea what a prescription drug benefit is 
going to cost because we have an explosion of technology going 
on. We will see genetic----
    Mr. Bilirakis. I'm sorry to interrupt, but your time has 
long expired.
    Mr. Ganske. [continuing] drugs that are going to be very 
expensive. So I think we need to make a decision. If we are 
going to provide some Federal funds to help those neediest, how 
do we do that without an open-ended commitment that could bust 
the bank and bring us back a year from now, a la 1988?
    Mr. Bilirakis. The gentleman from Florida, Mr. Deutsch.
    Mr. Deutsch. Thank you, Mr. Chairman. You know what? I have 
a prepared statement which I would like to submit to the 
record, but I think it appropriate to respond to what my 
colleague just mentioned. I think the year which is more 
appropriate to reflect upon is 1965, and that is when Medicare 
was created. I think that is a much more appropriate analogy to 
where we are today.
    Thirty-four years ago, health care in American was 
fundamentally different than it is today. There have been these 
fundamental changes, and a variety of statistics that we can 
talk about. The average cost that a senior, the percentage of 
their income paid out of pocket is actually more today, even 
with Medicare, which talks about the costs that are outside of 
Medicare, including the most significant one, which is 
prescription drug coverage.
    You know, I think some of the numbers, and numbers 
sometimes really do say things that are significant, there are 
more than 2 million seniors in America that spend over $1,000 a 
year on medication out of pocket, without reimbursement. Since 
Medicare, you know, average spending has risen from 11 percent 
in 1965 to over 18 percent now. It was 11 percent in 1965; it 
is over 18 percent of their income today.
    The reality is, and it is not just the poor, it is at many 
income levels, that people are making choices. I know many of 
my colleagues have had hearings in their district and talked to 
real people. I mean, I would encourage all of my colleagues to 
talk to their constituents. I mean, all of us sort of claim to, 
but sometimes I wonder how many of us actually do, actually do 
and talk to seniors and talk to real people, and what they are 
faced with on a day-to-day basis in terms of their lives.
    The choices that people were making 30 years ago, whether 
health care or food or to visit their grandchildren one time in 
6 months or one time in a year, I mean, those are similar 
choices people are now making about prescription drugs. Not 
everyone, obviously, but a significant number of Americans and 
our constituents.
    You know, I think this is clearly an issue whose time has 
come. Medicare wasn't passed in 1 hour, in 1 day, in one 
congressional session. It was fought tooth and nail, 
unfortunately, I think it goes without saying, by--and I don't 
like to be partisan so I won't be partisan--but by certain 
Members of Congress for many years. It was successfully fought, 
by certain interest groups, was successfully fought for years.
    But I think at a certain point what happens in the 
legislative process is it is overdetermined, and I think we are 
looking at something that in fact is overdetermined. The 
American people want this. It is appropriate, it is 
commonsense, it makes sense, it should happen, and you know 
what, it will happen.
    And I hope that there is a bridge that lasts between us, 
because it is the right thing. I applaud my chairman, my 
colleague from Florida, for having this hearing and being 
incredibly concerned and sensitive to this issue. And I urge 
all of my colleagues on both sides of the aisle to take this 
opportunity which we as Democrats offer you today, to sign a 
discharge petition, to sort of put your money where your mouth 
is and actually get this legislation passed for the American 
people.
    Mr. Bilirakis. A vote has been called on the floor. I would 
love to be able to get the opening statements out of the way 
before we run over.
    Mr. Bilbray, for an opening statement. Hopefully you can 
cut it down.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, I know many members of this committee and the 
full committee get kind of tired of those of us in California 
saying we do it this way or that way, and I understand that. I 
have been educated in the ABC's of Washington: Anybody but 
California. But I think that one of the frustrations we have 
had out West is that we are so far from Washington, DC, it is 
hard for our voices to be heard sometimes, even though with 32 
million people, the small intimate group.
    Today I want to really thank a lady for coming, Mrs. Lewis, 
who actually works with the osteoporosis group, she is a 
director in San Diego, and took the time and the effort to fly 
all the way across this continent to bring a message here. And 
I don't think she has the only message that we should be 
listening to, but I think it is one of the opportunities that 
we have as we address this challenge. And I want to thank Mrs. 
Lewis for coming out here and making this effort, because I 
think she has a message of some of the unique situations and 
some of the ideas that we have developed in San Diego, in 
California.
    That aside, I think that as we address this issue, it is 
not as simple as we would like it to appear at first blush. We 
can talk about why don't we spend more government funds on 
this, but then do we allow the pharmaceuticals to take 
advantage of an inflated price because of the huge influx of 
government money going into this field?
    Do we then all at once try to place price controls on and 
limit profits, which then may affect the commitment, the 
involvement in the development of new breakthrough drugs, and 
all at once not only reduce the accessibility to seniors but 
also the general population? Do we at the same time, when we 
talk about this issue, do we talk about R&D credits, about 
encouraging pharmaceuticals to do more research, to create new 
products that will compete with the ones on the field and break 
up some of these monopolies we have seen before?
    My colleague from Oklahoma points out the issue of 
advertisement, which is something that we legitimately should 
talk about.
    I think that the biggest thing that I would ask us to 
consider here is what we do with this issue does just not 
affect seniors. It affects the entire country, because access 
to pharmaceutical drugs and the breakthroughs and the miracles 
that we are seeing coming out of this industry comes at a 
price.
    But it also requires us to take a responsible approach to 
this, that the abuses of the pharmaceutical industry in this 
field is the enemy, but the pharmaceutical industry is not the 
enemy. It is obviously the guiding light of the future. And, as 
my colleague from Pennsylvania pointed out, there would not be 
a threat of major increased costs if there wasn't the fact that 
we are having these breakthrough drugs showing up every day, 
new breakthroughs.
    And so I think that we need to be responsible, and I 
strongly urge my colleagues to remember that this is not a 
Democrat or Republican issue, this is not a California or an 
East Coast issue. This is an American issue that is really 
leading the rest of the world, and hopefully we can get the 
facts, find reasons to find answers rather than finding excuses 
to be against each other, and keep an open mind.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Bilbray. Thank you, Mr. Chairman. I yield back.
    Mr. Bilirakis. Mr. Green, a brief opening statement, 
please.
    Mr. Green. Thank you, Mr. Chairman. I will submit my whole 
opening statement.
    Mr. Bilirakis. Without objection.
    Mr. Green. Following my colleague from California, I 
thought I was the only one that said how we do it in Texas is 
the way we should do it in the country. My concern is, we don't 
do it in Texas, and that is why we need to do it here as well 
as we should.
    And I know signing a discharge petition is one way to move 
the issue forward. I thank you, Mr. Chairman, for this second 
hearing. And I would hope that whether it is the discharge 
petitions, the two bills, or some other bill that maybe our 
subcommittee can put together, we need to address this issue 
this Congress. And because of the number of seniors that not 
only contact me, but from all over the country that talk to 
their Members, and like my own district does with the people 
who say they have to forego their prescriptions because they 
can't afford them. They are using most of their Social Security 
check to pay for their prescription medications.
    And, Mr. Chairman, it is an important issue, because when I 
can go into my district and show that seniors are paying almost 
twice as much for prescriptions than other groups that have 
negotiating power can receive, when they pay over twice as much 
and my constituents in Houston can drive to Mexico and receive 
those--it is a 6-hour drive from Houston--and buy the same 
pharmaceuticals, or that they could go down to their vet and 
buy those same pharmaceuticals for their animal, it is much 
cheaper than for humans. So that is why it is important this 
Congress to address it, and I yield back my time.
    [The prepared statement of Hon. Gene Green follows:]
  Prepared Statement of Hon. Gene Green, a Representative in Congress 
                        from the State of Texas
    Mr. Chairman: Thank you for convening this important discussion. I 
am pleased to have this opportunity to learn more about models for a 
prescription drug program.
    Most of us agree that the lack of prescription drug coverage for 
our seniors is a real and growing problem.
    And it is not just a problem for the poor--it is a problem for 
middle-income seniors who worked hard their entire lives, paid taxes, 
contributed to building our great country and are now forced to choose 
between buying medicine and buying groceries.
    I urge those here today--with their charts, numbers and figures, to 
remember that these percentages are people . . . and these people are 
in desperate need of prescription drugs.
    There are many ideas and options out there for how to put together 
a drug program. Some support the state-run method . . . others support 
vouchers . . . others support tax credits.
    All these approaches have their pros and cons, and I have no doubt 
that all are proposed in good faith.
    But as we continue this debate, we need to judge each of these 
proposals by a few important criteria.
    Number one: Does the proposal continue Medicare's traditional 
program structure by covering ALL seniors?
    Number two: Does the proposal provide free or reduced-price 
coverage to low income seniors?
    Number Three: Does the proposal ensure that seniors get the same 
benefits--and access to the same or similar drugs--in all regions and 
regardless of whether they are in fee-for-service or managed care 
plans?
    Number Four: Does the proposal ensure that the Medicare program 
continues its legitimate role in ensuring that the prescription drug 
program is fair and cost-effective?
    Number Five: Does the proposal ensure that seniors will have 
consumer protections and that they will continue to get benefits, even 
if an insurance company goes out of business?
    As we continue the debate on how to model a prescription drug 
program, I urge my colleagues to consider these five points and to 
measure all proposals against them. A drug benefit program that only 
covers a few, or only provides a limited benefit, will be of little or 
no use to America's seniors.
    Only by crafting a full and fair benefit can we meet the needs of 
our seniors. Anything less is unacceptable.

    Mr. Bilirakis. I thank the gentleman.
    Mr. Lazio.
    Mr. Lazio. Thank you very much, Mr. Chairman. I want to 
thank you as well for holding the hearing, and it has been a 
pleasure working with you on this issue, and I want to thank 
the staff as well.
    I guess my quick question is, how much good are we going to 
do for seniors if our only concern is cost, which is what I 
think I hear from some members on this panel, and the issue of 
quality is effectively dismissed?
    This past Sunday night ESPN hosted their Espy awards. 
Usually the show highlights world records, Super Bowls and 
record-high salaries, but this year they also awarded a 1999 
comeback athlete of the year award to Lance Armstrong. He made 
world headlines last summer with the most stunning comeback 
ever in the history of sports, his 1999 victory at the Tour de 
France.
    As most of us know, his stunning comeback has less to do 
with his athletic achievement, since he was the No. 1 ranked 
cyclist in the world in 1996, but more to do with his amazing 
victory from cancer. In the fall of 1996 Armstrong was 
diagnosed with testicular cancer. The cancer spread to his 
lungs, and he was given about a 20 percent chance of survival. 
He was 25 years old.
    For the next 2 years he aggressively attacked his illness 
like he did racing bicycles. However, he couldn't do it alone. 
In his acceptance speech he spoke about how his competitive 
nature and will to live was not enough. He needed the best 
therapies and medicines available to him to win this battle 
with cancer. Without research, he said, he would not have been 
there to accept the award.
    That is true with cancer and diabetes and a whole rift of 
different diseases that plague both seniors and the rest of the 
population. Access is the key, and price controls in my opinion 
are not. Price controls do not allow new breakthrough medicines 
and lifesaving therapies to reach my constituents.
    I just want to take one example, two examples, and briefly, 
Mr. Chairman. The story of a Long Island senior who wrote me in 
disgust about the President's plan. She had approximately $500 
in drug costs last year. Under the Clinton plan she would have 
to pay $552.40 for her prescriptions. Well, that doesn't make 
sense. She is paying $52.40 extra each year to belong to 
Clinton's plan, and we are supposed to call this a benefit.
    I have also received a large amount of constituent mail 
regarding a new, wonderful, but extremely expensive drug for 
rheumatoid arthritis. Many people are aware of it. For this 
$14,000-per-year drug, a senior participating under the Clinton 
plan would still be paying $12,697 per year, and we are 
supposed to call this a benefit. I think we can do better.
    We know there are market-oriented solutions, at least to 
alleviate part of the pressure, through PBMs and other 
mechanisms that will help drive the price down. We know if we 
get more seniors or all seniors into plans like that, they will 
be able to take advantage of the same discounted prices and 
price rebates that seniors participating in Medigap and other 
insurance that covers prescriptions get. And we also know that 
if we have a federally mandated price control system in place, 
that we will not have the kind of breakthrough drugs that 
people like Lance Armstrong were able to use to triumph over 
his illness.
    Mr. Bilirakis. Let's make the vote. The gentleman's time 
has expired.
    [Additional statements submitted for the record follow:]
  Prepared Statement of Hon. Fred Upton, a Representative in Congress 
                       from the State of Michigan
    Mr. Chairman, thank you for holding today's hearing to examine ways 
in which we might craft a prescription drug benefit for Medicare 
beneficiaries. I am deeply concerned about the burden borne by many 
individuals who do not have insurance coverage for prescriptions. No 
senior citizen should be forced to forego needed medication, take less 
than the prescribed dose, or go without other necessities in order to 
afford life-saving medications.
    I read and sign all of my mail, and I have seen a dramatic increase 
over the past several years in the number of Medicare beneficiaries 
writing to me about the struggle they are having with rising 
prescription drug costs. These are not form letters I am referring to. 
They are hand written letters--often with their bills enclosed. We are 
fortunate in Michigan to have a state prescription drug program, but 
this covers only low-income individuals with high monthly drug costs. 
Further, we have no Medicare managed care plans in our district because 
Medicare's payment rates are too low to attract plans. Thus, my 
constituents are denied access to coverage through this route. Yet they 
have paid the same Medicare payroll taxes into the system over the 
years and pay the same monthly premiums as beneficiaries who do have 
this choice. This is a matter of fairness, as well, for my 
constituents.
    Because of my keen interest in addressing this issue, I am very 
glad to be serving with you the House Leadership's prescription drug 
task force led by our Chairman. Our nation leads the world in the 
development of new drugs and medical devices that enable us to 
effectively treat diseases and conditions. But if people cannot afford 
to buy these drugs, their benefits are lost to many in our population.
    I share the task force's goal of and commitment to ensuring that 
every Medicare beneficiary has access to affordable coverage and has 
protection from unusually high out-of-pocket costs. I am committed to 
crafting a plan that is senior friendly--one which avoids the often 
complex, complicated bureaucracy of the current Medicare program.
    Our goal in crafting this plan must also be one of ensuring that 
our nation continues to lead the world in the development of life-
saving new drugs. Over the past decade, we have seen so many 
breakthroughs in drug therapy, from a new, much more highly effective 
treatment and perhaps preventive for breast cancer, to anti-virals for 
AIDS and other diseases, to treatments for cystic fibrosis. As we 
continue to map the gene and understand more fully the link between 
genes and disease, think of the possibilities. We are perhaps within 
reach of preventing or curing diabetes, Parkinson's, Alzheimer's, and 
other debilitating and terrible afflictions. As our population ages, we 
need to encourage further breakthroughs in the prevention, treatment, 
and management of chronic, debilitating conditions such as arthritis 
and osteoporosis, for that is the only real hope of controlling health 
care costs. Crippling the incentives and resources needed for new drug 
discovery and development would dash these hopes, leave these promises 
unfulfilled, and condemn many to suffering and premature death.
    The task before us is daunting. It will take all of us, Republicans 
and Democrats, Ways and Means and Commerce, House and Senate and 
Administration, working together to pull this off and plug a huge hole 
in the Medicare program with a common-sense, workable, comprehensive 
drug benefit. We need to put aside partisanship and short-term 
political considerations and do what is right for our constituents and 
for the future of health care in America.
                                 ______
                                 
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you, Chairman Bilirakis, for holding this important hearing. 
Today's hearing will focus on various proposals for providing 
prescription drug coverage to seniors who do not have access to 
affordable coverage.
    I believe that we need to figure out how to expand insurance 
coverage for drugs, not attempt to give the government the ability to 
fix prices. Price controls never work. All they do is reduce supply or 
eliminate discounts that are available to some. As a matter of fact, 
the Omnibus Budget Reconciliation Act of 1990 (OBRA) required drug 
manufacturers to provide rebates to State Medicaid programs based on 
the lowest prices they charged to the purchasers in an effort to lower 
Medicaid drugs prices.
    As Chairman of the VA Subcommittee on Health, this is an issue that 
I'm very familiar with. In fact, in July 1997 we received testimony 
from Ms. Bernice Steindardt, of the GAO's Health, Education and Human 
Services Division, about this mandate. She told the subcommittee that 
the end result of the 1990 OBRA drug rebate was that many manufacturers 
raised drug prices (because of the size of the Medicaid market) to 
minimize the impact of the rebates. That is why we must be cautious in 
moving in the same direction as a way to provide our seniors with 
prescription drug coverage.
    One of the proposals we will hear about today is legislation to 
provide lower wholesale prices of drugs for Medicare-affiliated 
pharmacies. This has the potential of repeating the disastrous effects 
that were created by OBRA 90. Why is this the case? Because 
manufacturers would have a strong incentive to raise those ``lowest'' 
prices substantially in order to keep from losing their profit margins.
    The bottom line is that there is no simple solution to our problem.
    By enacting the Medicare Plus Choice program as part of the 
Balanced Budget Act of 1997, Congress sought to expand Medicare 
beneficiaries access to prescription drugs by allowing them to join 
health plans that offer this benefit. Congress' goal in the BBA was to 
extend to Medicare beneficiaries the same range of choices that exist 
for working Americans. Choosing between competing health plans offers 
Medicare beneficiaries greater promise of accessing the drugs they need 
than will government price controls.
    The bipartisan commission developed a proposal that is worth real 
discussion. The Breaux-Frist bill (S. 1895) would provide Medicare 
beneficiaries the same options that most federal employees, including 
the President and members of congress have. We should allow seniors the 
opportunity to take advantage of the changes in health care delivery 
benefiting every privately insured person. I am pleased that we are 
finally talking about this innovative and free market approach to help 
senior citizens.
    We need to help them gain access to affordable prescriptions 
through insurance coverage and the truly effective price competition of 
an active marketplace.
    That is why I support the Breaux-Frist bill because it would 
restructure Medicare, using the Federal Employees Health Benefits 
Program (FEHBP) as a model. This would ensure that seniors would have 
access to newer drugs and devices because they would choose the plan 
they want.
    I look forward to hearing distinguished witnesses.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    I'm pleased that the Subcommittee is holding this hearing today. 
This is the third hearing this Committee has held on the topic of 
senior citizens access to prescription drugs.
    I've been studying this issue closely for a number of months now 
and it is a tough one. It is clear that too many seniors have trouble 
affording their medications. It is equally clear that many seniors have 
drug coverage today that they like and don't want threatened by 
anything we do in Congress.
    Americans have the best health care in the world. My first goal in 
helping seniors afford medicine is to preserve what is good about our 
health system today. We are on the edge of remarkable breakthroughs in 
new drug therapies to treat and even cure diseases that just ten years 
ago were considered death sentences. We don't want to do anything to 
jeopardize this work.
    Yet, America's role as the world leader in drug research has its 
costs. Our challenge is to find ways to make sure seniors have access 
to needed medication without resorting to price controls or big-
government drug purchasing schemes.
    Many folks under 65 years old are fortunate to have health 
insurance to cover most or all of the costs of their prescription 
drugs. But Medicare does not pay for most prescription drugs for 
seniors. In my opinion, this shows that if a private insurance company 
tried to market and sell the Medicare benefit to Americans today, I 
would bet few would buy it--Medicare does not reflect how modern 
medicine is practiced and delivered.
    This is why I truly want to explore a way to give seniors access to 
all the private health coverage options available to Americans under 
the age of 65. Every Member of Congress has this choice. Lets give 
seniors the same choice.
    I want to develop legislation that provides all seniors access to 
affordable, private drug coverage. I believe we should assist those 
seniors who cannot afford to purchase this coverage. And I think it is 
critical that whatever we do, that we protect not only low-income 
seniors but those who have very high annual out-of-pocket drug costs.
    Whatever is done to help seniors with their drug costs, it must 
minimize the substitution of private health coverage with government 
run programs. Our first witness today, Mrs. Rita Lewis, will talk about 
her own experience. Like millions of other seniors, Rita is worried 
that Congress will harm her coverage. There has to be a way for us to 
strike a balance for those who need coverage and those who are already 
covered.
    Again, I want to thank the Chair for holding this hearing and look 
forward to the witnesses testimony.
                                 ______
                                 
Prepared Statement of Hon. Sherrod Brown, a Representative in Congress 
                         from the State of Ohio
    Should the Medicare program offer prescription drug coverage? What 
good is insurance if it covers the diagnosis, but not the cure? Of 
course Medicare should cover prescription drugs.
    But why can't we target coverage to just the lowest income seniors? 
Two reasons.
    Medicare works because every American contributes to it and every 
American benefits from it. A third of all seniors lack drug coverage, 
millions more are underinsured, employers are dropping their retiree 
coverage and private health insurers are ratcheting down their 
prescription drug benefits. This is a broad-based problem.
    Whether or not Medicare should cover prescription drugs is not a 
real question. If you believe this nation benefits from helping seniors 
live in good health and above poverty, than Medicare should cover 
prescription drugs.
    But it is expensive to cover prescription drugs. Can the U.S. 
afford it? Yes and no.
    We are the wealthiest nation in the world. Our retirees are 
collectively responsible for our current prosperity. Their security and 
well-being resonate across families, communities, and ultimately the 
nation. We can afford to--it is in out best interest to--provide 
seniors health care coverage that makes sense and that means providing 
prescription drug coverage.
    But we can not afford to waste tax dollars that otherwise could be 
used to bolster Medicare's long-term solvency. We can not afford to be 
ripped off. To be fiscally responsible, to best serve the public, we 
need to pay fair prices for prescription drugs.
    So the question is, are current prices fair?, if you define 
``fair'' as meaning ``necessary'' to finance future research and 
development.
    Maybe prices are fair. Maybe drug companies have no choice but to 
charge such high prices. I doubt it. Knowing how much drug companies 
are investing in marketing, knowing what their profit margins are, not 
to mention their CEO salaries, and knowing any reduction in prices 
could be largely offset by increase in the volume of sales, I doubt 
prices need to be this high. But even if drug manufacturers could 
justify their revenue requirements. How could they justify placing such 
a disproportionate burden on Americans?
    How can they justify charging Americans two and three and four 
times what they charge individuals in other industrialized countries? 
Why are prescription drugs more expensive here? Because other countries 
won't tolerate outrageous prices. We do. We don't negotiate prices. We 
don't demand that drug manufacturers reduce their prices to reflect the 
federally funded portion of research and development. And we don't make 
use of the collective purchasing power of 38 million seniors to demand 
fairly priced drugs. Instead, we nod our heads when drug manufacturers 
warn us that any action we take would stifle research and development.
    Drug prices can come down in the United States without stifling 
research and development. Take the case of medical devices. The 
Medicare program is the largest purchaser of medical devices in the 
United States. The Medicare program pays discounted prices for medical 
devices and yet new devices are developed every day. Obviously a fast 
way to make money is to charge inflated prices for prescription drugs. 
It works beautifully for a product so important to so many people. That 
does not make it necessary.
    So, what do we do about high prices? The drug industry says the 
best way to make prescription drugs affordable for seniors is to enroll 
all 38 million in private health insurance plans. I'm not sure I follow 
their logic. Look at what is happening in the private insurance market 
today. Health insurance premium increases are back in the double 
digits. Insurers blame prescription drug costs. Enrollees in private 
plans can expect higher co-pays and lower prescription drug caps.
    One of the fundamental truths about health insurance is the larger 
the pool of enrollees, the more stable the premiums and benefits will 
be. Fragmenting the risk pool has never been a good idea and it is 
certainly not a good idea when it comes to such a big ticket item as 
prescription drugs.
    We have other options. I have introduced legislation that would 
give drug manufacturers a choice. They could either disclose their true 
costs and work with us to bring prices down, or they could license 
their patents to generic drug companies and let the free market bring 
prices down to a more reasonable level. Mr. Allen has introduced 
legislation that would permit seniors to purchase drugs at discounted 
prices. Mr. Sanders and Mr. Barry have introduced legislation that 
would permit us to import drugs when they are priced less expensively 
in other countries.
    So I ask you again. Should Medicare provide prescription drug 
coverage for seniors? Yes. Will it be expensive? Yes. Is there 
something we can do to make it less expensive? Yes. Now is the time to 
stop debating this issue, and do what is right for seniors.
    Thank you, Mr. Chairman.
                                 ______
                                 
Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress 
                      from the State of California
    We've spent a great deal of time this Congress talking about the 
need to shore up the Medicare program.
    Yes, we must ensure the solvency of the program but we must also 
modernize it.
    The key to ensuring that the program covers the best that medical 
science has to offer is to provide a comprehensive prescription drug 
benefit.
    When Medicare was created in 1965, seniors were more likely to 
undergo surgery than to use prescription drugs.
    Today, prescription drugs are often the preferred, and sometimes 
the only, method of treatment for many diseases.
    In fact, 77% of all seniors take a prescription drug on a regular 
basis.
    And yet, nearly 15 million Medicare beneficiaries have no insurance 
coverage for prescription drugs whatsoever.
    This means that a lot of senior citizens--most of whom are on 
modest, fixed incomes--are spending a great deal of their monthly 
incomes on prescription drugs. In fact, 18% of seniors spend over $100 
a month on prescriptions.
    My senior constituents have told me about being forced to limit the 
amount they spend on groceries in order to pay for their prescription 
drugs.
    For some seniors, enrolling in Medicare managed care plans has 
provided them drug coverage. However, 11 million beneficiaries don't 
have access to any managed care plans.
    During the last two years, Medicare managed care plans have 
withdrawn from many regions, standing thousands of seniors, many of 
whom only signed up to get drug coverage in the first place.
    Today, only 16% of Medicare beneficiaries are enrolled in Medicare 
HMOs.
    Many managed care plans are dropping or severely limiting coverage. 
A recent Kaiser study found that current drug coverage in 
Medicare+Choice plans varies greatly and may be in jeopardy altogether 
as plans face declining profits.
    We can't rely solely on the private sector to provide this service. 
Prescription drugs must be included in the basic Medicare benefits 
package. And it must be affordable.
    When he enacted the Medicare program, President Johnson said, ``the 
benefits of this law are as varied and broad as the marvels of modern 
medicine itself.''
    I think we can all agree that the tremendous advances prescription 
drugs have made in the diagnosis and treatment of every illness from 
arthritis to Alzheimer's are today's greatest ``marvels of modern 
medicine.''
    Thirty-nine million seniors are relying on us to make sure they 
have access to these marvels. Let's not disappoint them.
    Thank you, Mr. Chairman. I look forward to hearing from the 
witnesses.

    Mr. Bilirakis. I would ask the first panel to come forward, 
and as soon as I return, we will get started. Thank you.
    [Brief recess.]
    Mr. Bilirakis. I ask Mrs. Rita Lewis and Dr. Beatrice Braun 
to please come to the table, take their seats. As Mr. Bilbray 
has already introduced her, Mrs. Rita Lewis is director of the 
Osteoporosis Support Group of San Diego; and Dr. Beatrice Braun 
is a member of the Board of Directors of AARP. Welcome, good 
ladies. I appreciate very much your being here.
    Your written statement that you have already submitted to 
the committee is already a part of the record. We will give you 
5 minutes to hopefully supplement it or complement it, if you 
will. Mrs. Lewis, please proceed. Take your time, but move that 
mike close because we certainly want to hear everything you 
have to say.

  STATEMENTS OF RITA H. LEWIS, DIRECTOR, OSTEOPOROSIS SUPPORT 
  GROUP OF SAN DIEGO, CALIFORNIA; AND BEATRICE BRAUN, MEMBER, 
                    BOARD OF DIRECTORS, AARP

    Mrs. Lewis. Can you hear me?
    Mr. Bilirakis. Yes.
    Mrs. Lewis. Good morning. It is a great honor to be here 
today before the Commerce Committee to share my thoughts about 
the Medicare program and prescription drugs.
    My name is Rita Lewis. I am 80 years old, and I live in San 
Diego, California. For the past 16 years I have received my 
Medicare benefits through a private health plan. I am very 
pleased with the quality of the care I receive from my doctors, 
nurses, and other health care providers.
    As a resident of San Diego, I have a wide variety of plans 
available to me. I stay with my plan because it works for me, 
and the doctors and nurses have never let me down. For the $15 
a month, I receive top notch care. The 11 medications I take 
daily have minimal cost.
    One of the best features of my plan is that I have so much 
less paperwork than friends of mine who are in the old Medicare 
program. They spend hours on the phone trying to sort out their 
bills. With my plan, it is easy to understand. When I go to my 
physician, I pay $5, and when I was hospitalized on several 
occasions, my private plan picked up 100 percent of the costs. 
This gives me peace of mind.
    Now, I would like to take a moment to talk about my own 
medical condition. When I was in my early 60's, I learned that 
I had osteoporosis, the bone disease that affects older women 
and some men. My doctors tried every available medicine to stop 
my bone loss, but they did not work and I lost over seven 
inches in height. My condition was so bad that my husband could 
not give me a hug without breaking one of my ribs, sometimes 
two.
    A new drug was developed to stop the deterioration of my 
bones. My doctor immediately prescribed this medication and I 
began to see the effects. The progression of my osteoporosis 
was stopped, and I have actually had bone mass increases. With 
the discovery of this new drug, I am now able to walk again 
every morning, 40 to 45 minutes, at a fast clip now.
    In addition to osteoporosis, I have several other medical 
conditions that are treated with prescription drugs. In total, 
I take eight medications a day and three calcium pills that 
amount to 11 pills. These drugs are vital to my health. My plan 
covers most of the costs for these drugs. My co-pay ranges from 
$10 to $30 for a 90-day program. I order my prescriptions by 
telephone or through my mail order program. Some are new brand 
name drugs, like my osteoporosis drug, and others are generic. 
It costs me in the neighborhood of $600 a year for my 
prescription drugs.
    I understand that some Members of Congress would like to 
add prescription drugs to the Medicare program. I am concerned 
that a large government approach will be confusing and will 
cost more. Like my husband Aaron says, ``There is no free 
lunch.'' While it is important for seniors to have access to 
prescription drug coverage, I think that plans like mine 
provide the best solution.
    In closing, let me leave you with one final thought. I am 
80 years old. I take eight medications a day. I see many 
doctors and nurses, and I have been in and out of the hospital. 
My health care plan works for me. I would like more healthy 
years to enjoy my husband, my children, my grandchildren, and 
so do a lot of other seniors. Please remember seniors like me 
when you consider changing Medicare. And thank you.
    [The prepared statement of Rita H. Lewis follows:]
                  Prepared Statement of Rita H. Lewis
    Good morning. It is a great honor to be here today before the 
Commerce Committee to share my thoughts about the Medicare program and 
prescription drugs.
    My name is Rita Lewis. I am 80 years old and I live in San Diego, 
California. For the past 16 years, I have received my Medicare benefits 
through a private health plan. I am very pleased with the quality of 
the care I receive from my doctors, nurses, and other health care 
providers.
    As a resident of San Diego, I have a wide variety of plans 
available to me. I stay with my plan, because it works for me and the 
doctors and nurses have never let me down. For $15 dollars a month, I 
receive top notch care. The 11 meds I take daily have minimal cost.
    One of the best features of my plan is that I have so much less 
paperwork than my friends who are in the old Medicare program. They 
spend hours on the phone trying to sort out their bills. With my plan 
it is easy to understand. When I go to my doctor, I pay $5. And when I 
was hospitalized on several occasions, my private plan picked up 100 
percent of the costs. This gives me peace of mind.
    Now, I would like to take a moment to talk about my own medical 
condition. When I was in my 60s, I learned that I had osteoporosis, the 
bone disease that affects older women, and some men. My doctors tried 
every available medicine to stop my bone loss, but they did not work 
and I lost over seven inches in height. My condition was so bad that my 
husband could not give me a hug without breaking one of my ribs.
    A new drug was developed to stop the deterioration of my bones. My 
doctor immediately prescribed this medication and I began to see the 
effects. The progression of my osteoporosis was stopped and I have 
actually had bone mass increases. With the discovery of this new drug, 
I am now able to walk again on my own and without canes. I keep fit by 
walking five days a week for 40-45 minutes.
    In addition to osteoporosis, I have several other medical 
conditions that are treated with prescription drugs. In total, I take 8 
medications a day and three calcium pills, for a total of 11 pills. 
These drugs are vital to my health. My plan covers most of the costs 
for these drugs. My copay ranges from $10 to $30 for a 90-day supply. I 
order my prescriptions by telephone or through my mail order program. 
Some are new brand name drugs, like my osteoporosis drug, and others 
are generic. It costs me about $600 a year for my prescription drugs.
    I understand that some Members of Congress would like to add 
prescription drugs to the Medicare program. I am concerned that a large 
government approach will be confusing and will cost more. Like my 
husband Aaron always says, ``there is no free lunch.'' While it is 
important for seniors to have access to prescription drug coverage, I 
think that plans, like mine, provide the best solution.
    In closing, let me leave you with one final thought. I am 80 years 
old. I take 8 medications a day. I see many doctors and nurses and I 
have been in and out of the hospital. My health care plan works for me. 
I want more healthy years to enjoy my husband, children, and 
grandchildren and so do other seniors. Please remember seniors like me 
when you consider changing Medicare.

    Mr. Bilirakis. Thank you very much, Mrs. Lewis.
    Dr. Braun, please proceed.

                  STATEMENT OF BEATRICE BRAUN

    Ms. Braun. Good morning. I am Bea Braun, from Spring Hill 
in Florida, and a member of AARP's Board of Directors, and I 
truly thank you, Mr. Chairman and members, for the opportunity 
to testify today.
    As we all know, since it was enacted Medicare has provided 
access to affordable health care and has kept many older people 
out of poverty, but the challenges are very large that we now 
face. As a retired physician, 50 years out of medical school, I 
have seen the practice of medicine change dramatically, 
particularly in the area of prescription drugs. Penicillin was 
just coming in when I was in medical school.
    Simply stated, prescription drug coverage is smart 
medicine. Yet, while most employer plans include drug coverage, 
Medicare does not. We are pleased that Congress, the 
administration and the drug industry recognize that 
prescription drug coverage must be a part of a strengthened 
Medicare program. The only question is how to do it.
    The AARP believes that a Medicare prescription drug benefit 
must be available to all and affordable for all beneficiaries, 
but the benefit should be voluntary so no one has to give up 
what they already have, as Mrs. Lewis says. And the benefit 
must be affordable for all beneficiaries, and not just those 
with low incomes. The benefit needs to assure that it helps 
middle income beneficiaries handle mounting prescription costs.
    Equally important, it needs to ensure enough participation 
in the benefit to avoid risk selection. One of Medicare's 
greatest strengths has been its success in pooling the risk of 
nearly 40 million beneficiaries. This has let Medicare avoid 
the cherry-picking that exists in the under-65 health insurance 
market. This broad risk pool must be sustained in order to keep 
Medicare strong and affordable.
    While 65 percent of beneficiaries may have some type of 
drug coverage, the employer-based retiree coverage is declining 
rapidly. Medigap coverage is very expensive, and limited in 
what and who it covers. And managed care coverage has proven 
unstable. Premiums are going up, and in many cases there have 
been pull-outs from various counties in the country, including 
my own.
    I am not attempting today to give a full review of the 
prescription drug proposals before Congress. That will take 
many more hearings. But as Congress undertakes this effort, I 
would like to raise the following fundamental questions that 
need to be answered by any drug proposal:
    Will the proposed prescription drug coverage be affordable 
to beneficiaries, and assure a viable risk pool for the 
program? These go hand-in-hand. How would insurers be prevented 
from cherry-picking beneficiaries? How would beneficiaries with 
very high drug costs be protected? Does the proposed benefit 
meet the needs of current and future beneficiaries?
    AARP is reserving judgment on current proposals until these 
and other questions about their impact on beneficiaries and the 
program itself are answered. How to provide Medicare 
beneficiaries with affordable prescription drugs is a huge 
challenge. We urge the Congress, the drug industry and 
consumers to engage in a serious debate on the merits of the 
full range of approaches.
    The success of any drug benefit proposal, as well as 
broader changes in Medicare, depend on a clear understanding on 
the part of the public and policymakers alike of the changes 
being contemplated. This will require not only extensive dialog 
but also a thorough analysis of how the proposal would affect 
current and future beneficiaries. In fact, if legislation is 
pushed through too quickly, before the effect on beneficiaries 
is known, AARP would be compelled to alert our members of the 
dangers in such legislation and why we could not support it.
    The AARP is committed to working with Members of Congress 
on a bipartisan basis to advance the debate over prescription 
drug coverage and to carefully explore the best options for 
securing Medicare's future. And I thank you, Mr. Chairman, for 
giving us the opportunity and for your efforts to examine the 
high costs of prescription drugs for our older Americans, 
including me.
    [The prepared statement of Beatrice Braun follows:]
        Prepared Statement of Beatrice Braun, AARP Board Member
    Mr. Chairman and members of the Committee, I am Beatrice Braun, a 
member of AARP's Board of Directors. I want to thank you for your 
interest in the issue of the high cost of prescription drugs and the 
difficulties older Americans have in paying for needed medications. 
AARP appreciates this opportunity to share our perspective on the need 
for a Medicare prescription drug benefit and some of the broader issues 
involved in reforming the Medicare program.
    For over thirty years Medicare has provided older and disabled 
beneficiaries with dependable, affordable, quality health insurance. I 
live in Florida, which has one of the largest beneficiary populations 
in the nation. As a retired physician, I have seen first hand how 
Medicare has made a difference in the lives of older Americans. 
Medicare has been instrumental in improving the health and life 
expectancy of beneficiaries in Florida and across the nation. It has 
also helped to reduce the number of older persons living in poverty.
    Medicare's promise of affordable health care extends beyond the 
current generation of retirees. Now, more than ever, Americans of all 
ages are looking to Medicare's guaranteed protections as part of the 
foundation of their retirement planning. AARP believes that in order 
for Medicare to remain strong and viable for today's beneficiaries, and 
for those who will depend on it in the future, we must confront the key 
challenges facing the program.
    Foremost among these challenges is ensuring that Medicare's 
benefits and its means of delivering care remain dependable even as 
they are updated to keep pace with the rapid advances in health care. 
The practice of medicine has changed dramatically since the Medicare 
program was created. We are now living in a time of amazing 
breakthroughs in medical technology. Among the most striking are the 
advances in the area of prescription drugs. Drug therapies that were 
not available when Medicare began are now commonly used to prevent and 
treat virtually every major illness. In many cases, new drugs 
substitute for or allow patients to avoid more expensive therapies such 
as hospitalization and surgery. In other cases, drugs facilitate 
treatment or provide treatment where none existed before, improving the 
quality and length of life for the patient. As a result, prudent 
reliance on prescription drugs now goes to the very core of good 
medical practice.
    Ironically, while older Americans typically need more medications 
than younger people, most employer plans include and rely on 
prescription drug coverage as an essential tool for medical management, 
but Medicare still does not. Consequently, high prescription drug 
prices impose significant financial hardship on the millions of 
Medicare beneficiaries who have inadequate or no insurance coverage for 
prescription drugs. It is important to remember that beneficiaries 
without coverage pay top dollar for their prescriptions because they do 
not benefit from discounts negotiated by third party payers as do most 
younger persons. AARP believes prescription drug coverage must be part 
of an improved Medicare program. Simply stated, prescription drug 
coverage is smart medicine.
    The second challenge facing Medicare is our nation's changing 
demographics. The retirement of the baby boom generation will nearly 
double the number of Medicare beneficiaries in the program. Medicare's 
financing and delivery systems must be capable of serving this enormous 
influx of beneficiaries whose health care circumstances, needs, and 
expectations will be similar in some respects to those of today's 
beneficiaries, but very different in others. Just as important, longer 
life spans are already causing rapid growth in the very old population. 
Medicare must be prepared to handle the unique health care needs of a 
growing number of older Americans who reach 85, or even 100.
    To meet these challenges, the program's long-term financial 
solvency must be secure. AARP supported the Balanced Budget Act of 1997 
as a first step towards securing Medicare's long-term solvency. The 
strong economy we now enjoy and the Medicare Trustees' projection of 
solvency to the year 2015 are good news. But, this does not mean we can 
afford to become complacent or that we can delay the debate over how 
best to strengthen Medicare.
    The deliberation over Medicare's future must be ongoing. It will 
take a sustained effort to update and improve Medicare. Changing a 
program that millions of Americans depend on for their health care is 
no small task. There must be a careful and thorough examination of the 
full range of issues--prescription drugs being only one issue among 
them--and a similarly careful effort to make sure that policy makers 
and the public alike understand the trade-offs that will be necessary.
    AARP believes that it would be a serious mistake for anyone to 
hinder debate on reform proposals. By the same token, it would be an 
error for the Congress to rush to judgment on any reform option before 
policy makers and the public understood the proposed changes and their 
anticipated effect on beneficiaries, providers, and on the Medicare 
program in general. As we all learned over the recent BBA revisions, 
earlier experiences with the Catastrophic Coverage Act in the late 
1980s, and from the health care reform debate of the early 1990s, 
unless the American public understands the trade-offs they are being 
asked to make, and the changes that they will face, initial support can 
erode quickly.
           the need for a medicare prescription drug benefit
    AARP is pleased that the Subcommittee has begun to examine the 
various Medicare prescription drug proposals before the Congress and is 
developing its own prescription drug benefit plan. The work you are 
embarking upon is extremely challenging; it is also immensely important 
to millions of Americans who take prescription medications. It is our 
hope that today's hearing will help focus attention on the need for an 
affordable Medicare prescription drug benefit for all beneficiaries, as 
well as on other Medicare reform issues.
    As new prescription drugs are becoming available to treat and even 
prevent more and more serious conditions and life-threatening 
illnesses, reliance on these drugs has become especially significant 
for older Americans. Eighty percent of retirees use a prescription drug 
every day. While older Americans comprise only 12 percent of the U.S. 
population, they account for one-third of prescription drug spending. 
In fact, after premium payments, prescription drugs account for the 
single largest component of health care out-of-pocket spending, for 
non-institutionalized Medicare beneficiaries age 65 and older. On 
average, these beneficiaries spend as much out-of-pocket for 
prescription drugs (17 percent of total out-of-pocket health care 
spending) as for physician care, vision services, and medical supplies 
combined. By contrast, inpatient and outpatient hospital care each 
accounts for about 3 percent of older beneficiaries' total out-of-
pocket health spending.
    High use, high drug prices, and inadequate insurance coverage pose 
serious problems for today's Medicare beneficiaries. A chronic health 
problem necessitating some of the newest, most expensive prescription 
drugs can deplete a retiree's financial resources. Some beneficiaries 
are forced to choose between food and their medications. Others do not 
refill their prescriptions or take the proper dosage in order to make 
their prescriptions last longer. A new international health care survey 
of the elderly by the Commonwealth Fund reports 7 percent of adults age 
65 and over did not even fill a prescription due to cost.
    Because of Medicare's current lack of prescription drug coverage, 
many beneficiaries must pay for prescription drugs completely out-of-
pocket. While some beneficiaries may have employer-based retiree 
coverage, or be able to purchase private supplemental coverage that 
assists with costs, or join a Medicare HMO that offers a prescription 
drug benefit, these coverage options are inadequate, limited, 
expensive, and unstable. For instance, a new study by the Commonwealth 
Fund, reports that many Medicare beneficiaries do not have continuous 
prescription drug coverage. In 1996, just 53 percent of beneficiaries 
had prescription drug coverage throughout the year.
    Although 65 percent of Medicare beneficiaries have some type of 
coverage for prescription drugs, this figure can be very misleading. In 
fact, the majority of Medicare beneficiaries--not just those with low 
incomes--need drug coverage in Medicare. Why?
    First, Medicare beneficiaries' current prescription drug coverage 
does not protect them from high out-of-pocket expenses. AARP estimates 
that 25 percent of Medicare beneficiaries spent over $500 out-of-pocket 
on prescription drugs in 1999, and over half of these beneficiaries had 
some type of coverage. Forty-two percent of beneficiaries who spent 
$1,000 or more on their prescription drugs (excluding insurance 
premiums) had some type of drug coverage. For example, some 
beneficiaries buy Medigap policies that provide a drug benefit. Two of 
the three Medigap policies that cover prescription drugs have an annual 
cap of $1,250 on drug coverage; the third policy has a $3,000 cap. All 
three Medigap policies that have a prescription drug benefit require 
the beneficiary to pay 50 percent coinsurance. It is interesting to 
note that while Medigap drug coverage is quite limited, the premiums on 
these policies exceed $1,000 a year. Other beneficiaries choose to 
enroll in Medicare HMOs that offer some prescription drug coverage. 
Yet, this year 32 percent of Medicare HMOs offering drug coverage have 
a $500 cap that applies to brand or to brand and generic drugs, and 
average copays in these plans have increased dramatically from last 
year--an estimated 21 percent for brands and 8 percent for generics.
    Second, current prescription drug coverage available to Medicare 
beneficiaries is limited. Private Medigap policies may be the only 
option for obtaining drug coverage for beneficiaries who do not have 
access to employer coverage or Medicare+Choice plans. Yet, because 
almost all Medigap policies with drug coverage exclude beneficiaries 
based on pre-existing conditions once they have passed the first six 
months of their Medicare eligibility, and because not all three Medigap 
policies that include prescription drugs are not offered everywhere, 
many Medicare beneficiaries desiring such coverage cannot obtain it. 
Additionally, although Medicare HMOs are prohibited by law from 
underwriting the coverage they offer, such plans are not available in 
all parts of the country.
    Third, current drug coverage options are not stable. For example, 
beneficiaries who obtain prescription drug coverage from their former 
employer are finding that coverage to be unstable. Retiree health 
benefits that include prescription drug coverage are becoming more 
scarce. While an estimated 60 to 70 percent of large employers offered 
retiree health coverage during the 1980s, fewer than 40 percent do so 
today. Of those employers who offer retiree benefits, 28 percent do not 
offer drug coverage to Medicare eligible retirees.
    Further, beneficiaries who have drug coverage through Medicare HMOs 
cannot depend on having this coverage from year to year as plans can 
change benefits on an annual basis or even terminate participation in 
Medicare. For example, this year many beneficiaries in Medicare+Choice 
plans are living through abrupt changes in their prescription drug 
coverage that they did not foresee when they enrolled. Some of the most 
visible of these changes include:

 Increasing premiums--Over the past few years, more and more 
        Medicare+Choice plans are charging premiums for their coverage, 
        and those premiums are climbing. This year 207,000 
        beneficiaries must pay over $80 per month to enroll in a 
        Medicare HMO. This compares to 1999 when only 50,000 Medicare 
        beneficiaries enrolled in Medicare HMOs had a premium above $80 
        per month.
 Higher cost-sharing--For the first time this year, all 
        Medicare HMOs that provide prescription drug coverage are 
        charging copays for those prescription drugs, and the average 
        beneficiary copay has increased significantly.
 Decreasing benefit--The annual cap on the typical 
        Medicare+Choice drug benefit has decreased. While in 1999 only 
        21 percent of Medicare HMOs had an annual cap of $500 or less 
        on their drug benefit, this year 32 percent of plans will have 
        a $500 cap.
 Loss of benefit--This year some Medicare+Choice plans dropped 
        their prescription drug benefit entirely. Although 
        Medicare+Choice has provided beneficiaries with an opportunity 
        for drug coverage, the volatility of the Medicare+Choice market 
        has made that coverage unpredictable and unstable from year to 
        year.
        issues surrounding adding prescription drugs to medicare
    AARP is committed to the creation of a voluntary, affordable 
Medicare prescription drug benefit that would be available to all 
beneficiaries, so that they may benefit from longer, healthier lives, 
fewer invasive medical procedures, and reduced health care costs. We 
appreciate the Subcommittee's interest in this issue and look forward 
to working with the Congress and the Administration to assure that a 
prescription drug benefit that is available and affordable to all 
Medicare beneficiaries becomes part of Medicare's defined benefit 
package. To that end, we have identified principles that we believe are 
fundamental to the design of a Medicare prescription drug benefit:

 A Medicare prescription drug benefit must be available to all 
        Medicare beneficiaries. First, the benefit should be voluntary 
        so that beneficiaries are able to keep the coverage that they 
        currently have, if they choose to do so. A Medicare 
        prescription drug benefit should not be an incentive for 
        employers to drop or cut back on retiree health coverage. 
        Second, the benefit needs to be affordable to assure enough 
        participation and thereby avoid the dangers of risk selection. 
        To this end, the government contribution will need to be 
        sufficient to yield a beneficiary premium that is affordable, 
        and a benefit design that is attractive to beneficiaries. In 
        other words, this is not simply a matter of beneficiary 
        affordability, but equally important, the fiscal viability of 
        the risk pool. Medicare Part B is a model in this regard. The 
        Part B benefit is voluntary on its face, but Medicare's 
        contribution toward the cost of the benefit elicits virtually 
        universal participation.
 Prescription drugs should be a defined benefit and part of a 
        defined benefit package. It is critical that beneficiaries 
        understand what is included in their benefit and that they have 
        dependable and stable prescription drug coverage. In addition, 
        defining the drug benefit would reduce the opportunity for risk 
        selection.
 The benefit must assure beneficiaries have access to medically 
        appropriate and needed drug therapies.
 The benefit must include quality improvement components to 
        reduce medical errors and mismedication and to help reduce 
        overall health care costs.
 The benefit must include meaningful cost-containment 
        mechanisms for both beneficiaries and Medicare. This should 
        include drug-purchasing strategies that enable Medicare 
        beneficiaries and the program to take advantage of the 
        aggregate purchasing power of large numbers of beneficiaries.
 The benefit must provide additional subsidies for low-income 
        beneficiaries to protect them from unaffordable costs and 
        assure that they have access to the benefit.
 The benefit must be financed in a fiscally responsible manner 
        that is both adequate and stable. AARP believes that an 
        appropriate amount of the Federal budget surplus should be used 
        to help finance a prescription drug benefit.
 A new prescription drug benefit should be part of a strong and 
        more effective Medicare program. Prescription drug coverage 
        must be integrated into the program in a manner that 
        strengthens Medicare by improving the program's ability to 
        support modern disease management and prevention strategies. 
        Many of these strategies hold promise to both improve health 
        outcomes and lower program costs.
            prescription drug proposals before the congress
    The need to modernize the Medicare program to address the lack of 
prescription drug coverage has become a major issue for the 106th 
Congress. Several types of proposals for establishing a Medicare 
prescription drug benefit have been introduced. At this time, AARP has 
not taken a position on any of the proposals before Congress. As these 
plans continue to be refined, we have reserved judgment until further 
questions can be answered. We have not attempted in this testimony to 
undertake an extensive review of all of the prescription drug proposals 
introduced and the full range of questions that they raise. That 
essential step will require many more hearings, close review by a range 
of experts, and careful assessment of the impact of the proposed 
changes on beneficiaries, plans, providers, and the program itself. 
However, we have tried to summarize the major types of policy 
approaches before the Congress and the fundamental questions that must 
be answered about each.
President Clinton's Proposal
    The approach put forward by President Clinton requires Medicare to 
pay for 50 percent of beneficiaries' prescription drug costs. This 
Medicare benefit would be available to all beneficiaries, but would be 
voluntary. Benefit management would be contracted out to private 
entities, such as pharmacy benefit managers (PBMs). This approach would 
allow market forces to reduce drug prices for beneficiaries because the 
contracted third parties could negotiate the same types of discounts 
from manufacturers and pharmacies for Medicare as they currently 
negotiate for health plans and HMOs. The government would be distanced 
from the role of determining prices under this approach. Additional 
financial assistance would be provided to low-income beneficiaries and 
financial incentives would be offered to employers to ensure that they 
retain current retiree health benefits. The Administration has now also 
suggested a new catastrophic benefit, although the details have not 
been spelled out.
    While AARP is pleased that the President's proposal includes 
prescription drug coverage for all beneficiaries, details of his plan 
are forthcoming and there are still unanswered questions about how a 
Medicare-based proposal would work. For instance:

 Will this prescription drug coverage be affordable to 
        beneficiaries?
 Are the proposed benefit package and subsidy sufficient to 
        attract a large number of beneficiaries?
 How would the President's new additional benefit to protect 
        those beneficiaries with extremely high drug costs work?
    The Kennedy-Stark-Dingell bill takes a similar Medicare-based 
approach as the President's, but would provide a different and more 
generous benefit structure. Although the bill's proposed benefit would 
include a deductible of $200, the beneficiary's coinsurance would be 20 
percent rather than 50 percent, as proposed by the President. In 
addition, the Kennedy-Stark-Dingell bill would include a cap on the 
benefit of $1700 and stop-loss protection after the beneficiary has 
$3000 in out-of-pocket prescription drug expenses. This proposal raises 
the following questions:

 What happens to beneficiaries after they have exceeded the 
        benefit cap but before they are eligible for stop-loss 
        protection?
 Would beneficiaries support this type of benefit structure?
 Does this type of benefit meet the need of most current and 
        future beneficiaries?
The Breaux-Frist Proposal
    The approach introduced by Senators Breaux (D-LA) and Frist (R-TN) 
provides some subsidy to all beneficiaries interested in purchasing 
prescription drug coverage. Unlike the President's plan, this approach 
would not create a defined prescription drug benefit; rather, it allows 
entities, such as insurance companies or health plans, to offer any 
type of benefit so long as the benefit is equal to a certain actuarial 
value. Plans would compete by varying their drug benefit design.
    AARP is pleased that the Breaux-Frist bill improves upon earlier 
versions of the proposal in that it would include some form of subsidy 
for all beneficiaries who choose to purchase a ``high option'' plan. 
However, we have several questions that relate to our belief that the 
benefit must be affordable and avoid risk selection. These questions 
include:

 Is the prescription drug benefit affordable? Is a 25 percent 
        premium subsidy enough to create a viable risk pool and make 
        the benefit affordable for most beneficiaries?
 How would insurers be prevented from ``cherry picking'' 
        beneficiaries since the drug benefit would be pegged to an 
        actuarial cost and not to a particular benefit design?
 What will be the effect on quality of care and on 
        beneficiaries or program cost of having a prescription drug 
        that is administered separately rather than as part of the rest 
        of Medicare? Will this lack of integration lead to cost-
        shifting or poorer quality care?
 Will prescription drug insurance that is offered through 
        private entities be more expensive for beneficiaries and for 
        the Medicare program than a benefit administered by Medicare 
        because Medicare does not have to make a profit, and has lower 
        administrative overhead costs?
 Will high-option stop-loss protection extend to the 
        prescription drug benefit? How would beneficiaries who have 
        very high drug costs be protected?
The Bilirakis Proposal
    Another approach, illustrated by Representative Bilirakis' (R-FL) 
bill, is to create a state-based approach for low-income beneficiaries, 
while expanding Medicare's benefits to include stop-loss protection so 
that the program would cover prescription drug costs once a 
beneficiary's annual out-of-pocket expenses reached a specified 
threshold. This approach would rely on the states to develop mechanisms 
for reducing prescription drug costs for low-income beneficiaries. 
While AARP opposes a Medicare prescription drug benefit for low-income 
beneficiaries only, the approach of providing low-income drug 
assistance outside of the Medicare program deserves further review. 
However, a state-based approach with accompanying Medicare stop-loss 
protection raises the following types of questions:

 How will the state low-income drug assistance program work? 
        Would all states offer a low-income prescription drug program?
 What processes would be established for enrollment and 
        outreach in the state-based low income prescription drug 
        programs?
 Would there be any incentives for Medicare+Choice plans to 
        keep offering a drug benefit or to offer wrap-around coverage?
 Would receipt of Medicare stop-loss protection be conditioned 
        on the purchase of private sector insurance?
The Allen Proposal
    Another approach, reflected in Representative Allen's (D-ME) bill, 
attempts to lower prescription drug prices by limiting the prices that 
manufacturers could charge beneficiaries. This approach does not 
involve the creation of a Medicare prescription drug benefit, but 
rather would lower drug prices by legislatively tying the prices paid 
by retail pharmacies for drugs sold to Medicare beneficiaries to the 
best prices paid by the government. Although it does not provide a 
Medicare benefit, the Allen approach has helped focus attention on the 
inequity of prescription drug pricing and merits review. However, a 
prescription drug discount approach raises the following types of 
questions:

 Will manufacturer discounts be passed on to Medicare 
        beneficiaries?
 Will manufacturers engage in cost-shifting?
 Will a lower return on pharmaceuticals taken by beneficiaries 
        discourage manufacturers from further research and development 
        of drugs mainly used by older Americans?
                      options for medicare reform
    The above policy approaches for dealing with the high cost of 
prescription drugs illustrate one challenge we face in modernizing 
Medicare. The President's Medicare reform proposal, the plan introduced 
in the Senate by Senators Breaux and Frist, and proposals that will 
likely emerge from the House, provide opportunities for furthering 
debate about Medicare's future. We urge the Congress to carefully 
examine the different reform options and begin to answer some of the 
most critical issues surrounding broad changes to Medicare, including:

 How, and to what extent, would Medicare's long-term solvency 
        be improved?
 Would fee-for-service Medicare remain an affordable option for 
        beneficiaries of all incomes?
 Would all beneficiaries--regardless of the area of the country 
        in which they live--have access to the same set of defined 
        Medicare benefits?
 Would a prescription drug benefit be affordable and available 
        to all beneficiaries?
 Would the level of the government's contribution continue to 
        assure adequate choice for beneficiaries over time, without 
        regard to where they live?
 How would beneficiaries be protected from high out-of-pocket 
        costs?
 Would the entity responsible for administering Medicare be 
        accountable to Congress and to beneficiaries?
 How would Medicare reforms be financed?
        key principles that should guide broader medicare reform
    As this Committee also examines the broader issue of reforming 
Medicare, AARP urges you to consider the fundamental principles that, 
since Medicare's inception, have helped to shape it into such a 
successful program. We believe strongly that these principles must be 
the basis of any viable reform option.
Defined Benefits Including Prescription Drugs
    All Medicare beneficiaries are now guaranteed a defined set of 
health care benefits upon which they depend. A specified benefit 
package that is set in statute is important for a number of reasons. 
First, it assures that Medicare remains a dependable source of health 
coverage over time. Second, a defined benefit package serves as an 
important benchmark upon which the adequacy of the government's 
contribution toward the cost of care can be measured. Without this kind 
of benchmark, the government's contribution could diminish over time, 
thereby eroding Medicare's protection. Third, a benefit package set in 
statute reduces the potential for adverse selection by providing an 
appropriate basis for competition among the health plans participating 
in Medicare. And finally, a defined benefit package provides an element 
of certainty around which individuals, employers, and state Medicaid 
programs may plan.
    As was laid out earlier in this statement, because prescription 
drugs are central to the delivery of high quality health care, Medicare 
should be like most other health insurance plans and include 
prescription drugs as part of Medicare's defined benefit package 
offered by all participating plans--including traditional fee-for-
service.
Adequate Government Contribution Toward the Cost of the Benefit Package
    It is essential that the government's contribution or payment for 
the Medicare benefit package keep pace over time with the cost of the 
benefits. Currently, payment for traditional Medicare is roughly tied 
to the cost of the benefit package. If the government's contribution 
were tied to an artificial budget target and not connected to the 
actual cost of the benefit package, there would be a serious risk of 
both the benefits and government payment diminishing over time. The 
effect of a flat government payment--regardless of the plan cost--could 
be sharp year-to-year premium and cost-sharing increases for 
beneficiaries. It could also mean significant differences in what 
beneficiaries would have to pay for different Medicare plans.
Out-of-Pocket Protection
    Changes in Medicare financing and benefits should protect all 
beneficiaries from burdensome out-of-pocket costs. Medicare 
beneficiaries age 65 and over, spent on average, about $2,430--nearly 
20 percent of their income--out-of-pocket for health care expenses in 
1999, excluding the costs of home care and long-term nursing care. In 
addition to items and services not covered by Medicare, beneficiaries 
have significant Medicare cost-sharing obligations: a $100 annual Part 
B deductible, a $776 Part A hospital deductible, 20 percent coinsurance 
for most Part B services, a substantially higher coinsurance for 
hospital outpatient services and mental health care, and significant 
coinsurance for skilled nursing facility care and very long hospital 
stays.
    AARP believes that Medicare beneficiaries should continue to pay 
their fair share of the cost of Medicare. However, if cost-sharing were 
too high or varied across plans, Medicare's protection would not be 
affordable, and many beneficiaries would be left with coverage options 
they might consider inadequate or unsatisfactory.
Viable Fee-for-Service
    Medicare beneficiaries must continue to have access to a strong and 
viable fee-for-service option. Managed care is not yet established as a 
fully satisfactory choice for many beneficiaries. In addition, many 
beneficiaries live in areas of the country where managed care plans are 
not available or likely to become available. Without an affordable fee-
for-service option, these beneficiaries could end up paying as much or 
more out-of-pocket for health care coverage that does not meet their 
needs.
Protecting the Availability and Affordability of Medicare Coverage
    Medicare should continue to be available to all older and disabled 
Americans regardless of their health status or income. Our nation's 
commitment to a system in which Americans contribute to the program 
through payroll taxes during their working years and then are entitled 
to receive the benefits they have earned is the linchpin of public 
support for Medicare. Denying Medicare coverage to individuals based on 
income threatens this principle. Similarly, raising the age of Medicare 
eligibility would have the likely affect of leaving more Americans 
uninsured. Thus, in the absence of changes that would protect access to 
affordable coverage, AARP opposes efforts to raise the eligibility age 
for Medicare. Analogies to Social Security's increasing age of 
eligibility simply do not apply. Social Security's early retirement 
benefits--though actuarially reduced--start at age 62, and most 
retirees today begin to collect benefits at age 62 not at age 65.
Quality of Care
    Medicare beneficiaries have come to depend upon quality care in 
Medicare. Quality standards have been a hallmark of the program and 
have often served as a model for the private sector. Systematic data 
collection and analysis, careful quality monitoring, as well as new 
techniques for promoting quality outcomes, must remain a part of any 
reformed Medicare system.
Administration of Medicare
    Effective administration of the program remains essential. The 
agency or organization that oversees Medicare must be accountable to 
Congress and beneficiaries for assuring access, affordability, adequacy 
of coverage, quality of care, and choice. It must have the tools and 
the flexibility it needs to improve the program--such as the ability to 
try new options like competitive bidding or expanding centers of 
excellence. It must ensure that a level playing field exists across all 
options; modernize original Medicare fee-for-service so that it remains 
a viable option for beneficiaries; ensure that all health plans meet 
rigorous standards; and continue to reduce waste, fraud and abuse in 
the program.
Financing
    Medicare must have a stable source of financing that keeps pace 
with enrollment and the costs of the program. Ultimately, financing 
sources will need to be both broadly based and progressive. 
Additionally, because health care costs are rising faster than 
productivity, AARP supports using an appropriate portion of the on-
budget surplus to secure Medicare's financial health.
                               conclusion
    The Medicare program needs to be ready to meet the unique 
challenges it faces now and in the future. Foremost among the 
challenges is ensuring that, even as the program adjusts to ensure its 
future financial soundness, it must also adjust to keep pace with the 
rapid advances in medicine. Therefore, AARP believes that an affordable 
Medicare prescription drug benefit that is part of Medicare's defined 
benefit package and available to all Medicare beneficiaries is 
essential to any Medicare reforms.
    How to provide Medicare beneficiaries with affordable prescription 
drugs is a huge challenge. AARP urges all stakeholders--government, 
industry, and consumers--to engage in a serious debate on the merits of 
the full range of approaches. The success of any drug benefit proposal 
as well as broader changes to Medicare depend on a clear 
understanding--on the part of the public and policy makers alike--of 
the changes that are being contemplated. This will require not only 
extensive dialogue, but also a thorough distributional analysis of how 
the proposed changes would affect the full range of current and future 
beneficiaries.
    If legislation is pushed through too quickly, before there has been 
a thorough examination of the effect on beneficiaries and the program, 
and before there is an emerging ``public judgment'' about the changes, 
this would be a very serious mistake. In such a circumstance, we would 
be compelled to alert our members to the dangers in such legislation 
and why we could not support it.
    We thank you for your efforts to examine proposals to establish a 
prescription drug benefit for Medicare beneficiaries. AARP looks 
forward to continuing to work with members of this Subcommittee and the 
Congress to advance the debate over prescription drug coverage, and to 
carefully explore the best options for securing Medicare's future.

    Mr. Bilirakis. Thank you, Dr. Braun. Thank you both for 
your testimony. Of course, Dr. Braun, it is always a pleasure 
to welcome a fellow Floridian before the subcommittee.
    As a Representative of one of the oldest districts in the 
country and a senior myself, I am particularly sensitive about 
the struggle many Medicare beneficiaries face in obtaining the 
medicines they need. I have said repeatedly that our most 
vulnerable seniors deserve help right now. Dr. Braun, your 
written statement included a caution that I would summarize as 
haste sometimes makes waste, and I certainly agree with you.
    Over the past couple years, members of the Medicare 
Commission, administration officials, experts in the private 
sector, and many Members of Congress have given considerable 
thought to these issues, but I believe that we must act. I 
still feel that we must act this year to ensure that no senior 
citizen is forced to choose between buying groceries and 
filling a prescription. And, Dr. Braun, you clearly said it is 
a huge challenge.
    My fundamental question to both of you is, yes, we need to 
reform Medicare, and yes, we need to do it as quickly as we 
can, but we want to get it right. I ask you, if Congress and 
the President do not reach an agreement on broader reform to 
protect and improve Medicare this year, which almost certainly 
would include prescription drugs, the question is, don't we 
have a moral obligation to help the poorest and the sickest 
beneficiaries now, rather than just wait until we can finally 
get around to reform? And I would ask Mrs. Lewis if you have an 
opinion----
    Mrs. Lewis. I would totally agree with that.
    Mr. Bilirakis. Do you have any explanation that you would 
like to offer in that regard?
    Mrs. Lewis. No, I really don't.
    Mr. Bilirakis. Dr. Braun?
    Ms. Braun. Yes, I certainly think we need to help our low-
income beneficiaries a great deal, but you and I both realize 
that middle income beneficiaries actually are having a great 
deal of trouble also, particularly if they have high drug 
costs. The median household income, not individual income but 
household income of those over 65 is $20,000 a year, which I 
think all of us would have difficulty getting along on. And if 
they have high drug costs, even though they are middle income, 
they really have a big problem.
    I would hope that we might be able to pass something that 
would be available for all beneficiaries, that could be 
affordable, and also that could be voluntary so it doesn't take 
away from anything that people have, like Mrs. Lewis is very, 
very fortunate with the coverage that she has. And I certainly 
realize that we need to work cost containment into the 
situation, and we also need to work quality into the situation. 
There are just a lot of principles that we are going to need to 
follow. And I don't think, while a low income benefit, not in 
Medicare because Medicare really should be the same for all its 
beneficiaries, but even outside of Medicare, our ideal, it 
could be done certainly, as I know the chairman has proposed.
    Mr. Bilirakis. What we have proposed, of course, is not 
just the poorest, the low income beneficiaries outside of the 
scope of Medicare----
    Ms. Braun. Right, right.
    Mr. Bilirakis. [continuing] people who are Medicare 
beneficiaries, but we have also proposed something to help the 
sickest because of the stop-loss provision. Dr. Braun, in an 
ideal world, if you could satisfy the quality situations and 
address the areas that Dr. Coburn and so many others have 
mentioned, and you had no problems with the finances--and 
Medicare program certainly has a lot of problems, financially 
and otherwise--you could do something equally for all 
beneficiaries, including Ross Perot and so many others in that 
category. I certainly don't put you in that category----
    Ms. Braun. No. I wish.
    Mr. Bilirakis. [continuing] but you are not in the lowest 
economic strata.
    Ms. Braun. No, I am not in the lowest.
    Mr. Bilirakis. Don't we have a moral obligation, if we have 
a shortage of resources, to help at least the sickest people 
and the poorest people now, and then hope that eventually we 
might get to the point where we are able to reach the goal that 
the AARP and Mr. Waxman and others have mentioned of doing 
everything equally across the board for all Medicare 
beneficiaries?
    Ms. Braun. I really think the need is there for all 
Medicare beneficiaries. That is the problem.
    Mr. Bilirakis. For all, equally? An equal need?
    Ms. Braun. No. Low income would certainly need subsidies, 
and they do have a tremendous need, and I can understand the 
chairman's thoughts on that subject, but I really do think 
there is a need across the board for all beneficiaries. And I 
think with the chairman's thoughts, doing it outside certainly 
is better than trying to do something in Medicare which would 
only be available for certain people. But I think we have a lot 
of concerns about what would the States do with this, how many 
would step up to the plate, and----
    Mr. Bilirakis. Well, we don't know, but they seem to be 
moving toward that. I understand that the National Conference 
of State Legislatures has put that at the top of their agenda.
    Well, my time has long expired. Mr. Waxman?
    Mr. Waxman. Thank you, Mr. Chairman. I am pleased to hear 
from the two witnesses today.
    Dr. Braun, as I understand your testimony, you don't 
disagree with Mrs. Lewis. If she has good coverage, you want 
her to stay with her coverage.
    Ms. Braun. Absolutely.
    Mr. Waxman. She shouldn't have to be pushed into something 
else if she doesn't want to.
    Ms. Braun. Absolutely. I think that is wonderful. As I say, 
in the county above me all the managed care has pulled out. 
There isn't any. In my county one has pulled out. Another one 
which had most of the managed care people went from zero to $93 
a month for their premium. So there are real, real problems, 
and I think our rural areas will never really have managed 
care, so we do need to think in some other kinds of terms. Let 
the people who have coverage keep it, but the people that don't 
have it, we have got to think about.
    Mr. Waxman. Well, not all managed care plans have coverage.
    Ms. Braun. They are cutting down on it.
    Mr. Waxman. But a lot of people don't want to be in managed 
care, and if they stay in Medicare fee-for-service, which most 
seniors do, they ought to be able to have some help with the 
costs of their prescription drugs.
    Now, a lot of people are saying that we ought to only help 
people 150 percent of poverty and below. I guess they are 
compassionate conservatives because they care about low income 
people.
    Ms. Braun. That is good to hear.
    Mr. Waxman. It is good to hear, sort of surprising in some 
cases, but it is good to hear. But what is wrong with that? Do 
we have a problem for people above 150 percent of poverty? 
After all, just by the way, 150 percent of poverty for a 
married couple is $17,100.
    Ms. Braun. That is right.
    Mr. Waxman. For singles it is $12,750. That sounds pretty 
low, and I know there are people above that that are having 
problems with prescription drugs.
    Ms. Braun. That is very true. That is very true. There are 
a lot of people having problems with prescription drugs, 
particularly if they have rather high costs, and that risk 
needs to be spread. However the program is set up, we need to 
pull in, make it possible for people to come into the program 
so that it is worthwhile for the people who don't have problems 
as well as for the others.
    Mr. Waxman. If it is going to be voluntary, it has got to 
be a program that is affordable----
    Ms. Braun. Right.
    Mr. Waxman. [continuing] and to be affordable, you have got 
to bring in lots of people to participate.
    Ms. Braun. That is right.
    Mr. Waxman. Could anybody imagine what the reaction would 
be among your membership in AARP if we said Medicare was only 
going to be for people 150 percent of poverty and below?
    Ms. Braun. No. I would hope that that day will never come. 
Medicare is not a means-tested program. It is an insurance 
program that people have paid into, even Ross Perot.
    Mr. Waxman. Even Ross Perot has paid in, and everybody pays 
into Medicare, and then when they are eligible, they are 
entitled to it.
    Ms. Braun. That is right.
    Mr. Waxman. And if they are entitled to have insurance, 
insurance ought to cover prescription drugs.
    Ms. Braun. That is right. I would agree absolutely. In 
today's medicine it doesn't make any sense not to have 
prescription drug coverage.
    Mr. Waxman. What do you think of the argument that we 
shouldn't provide prescription drugs until we have reformed 
Medicare? I suppose people could then say that if you haven't 
reformed Medicare, you shouldn't do that unless you reform the 
whole health care system. Are we just hearing arguments that 
will keep us from doing anything?
    Ms. Braun. That might be true. I do think it would be 
ideal, if we could do it, to do it within the context of all of 
Medicare, but I think it may be a situation that we really need 
to move on and we won't be able. It will take us a while to 
move on total Medicare reform. I think particularly it would 
fit better into the whole program because the financing then 
could be considered for the whole program rather than just for 
a small program.
    Mr. Waxman. I have the impression that some of the people 
that are compassionate conservatives because they want to cover 
low income people, have more compassion about the 
pharmaceutical companies, making sure they can charge whatever 
they want for prescription drugs. If only low income people 
were covered, and of course we have the very low income now 
under Medicaid eligible for prescription drug coverage, what 
will it mean for drug companies? Won't they just continue to be 
able to discriminate against the elderly and charge them higher 
prices?
    Ms. Braun. It would sound so, but certainly no matter what 
kind of system is set up, it needs to have cost containment and 
there need to be--some of the cost containment things that are 
now in the private sector need to be introduced in order to 
have cost containment across the board. I think that is very 
necessary.
    Mr. Waxman. What about this argument that Medicare drug 
benefits are going to destroy research and development for new 
drugs, and therefore if we want new drugs, we shouldn't provide 
elderly people with Medicare coverage for their prescription 
drug costs?
    Ms. Braun. We really haven't seen any evidence of that 
happening in legislation that has come about in the past, and I 
certainly think we need to be sure that the research is still 
in place, that they continue. However, research is the lifeline 
of the pharmaceutical companies. It would be hard to think that 
they wouldn't try to find new drugs because that is where the 
profit is.
    Mr. Waxman. A lot of my Republican colleagues pointed out, 
and I think they are absolutely right, a lot of that money that 
the drug companies get goes into marketing. They are doing 
direct advertising on television, and they have other direct 
marketing costs. Some of those marketing costs in some 
companies rival what they are spending on research and 
development. If they had to cut back, maybe they will cut back 
on some of the marketing and continue the life flow of new 
drugs that the research and development would bring.
    Ms. Braun. Could be.
    Mr. Waxman. Thank you, Mr. Chairman.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Greenwood?
    Mr. Greenwood. Thank you, Mr. Chairman.
    Let me first say to Mrs. Lewis that I am delighted that you 
can walk at a brisk pace for 45 minutes. That is more than most 
Members of Congress can do. But it shows us the increased vigor 
that today's elderly have. My parents are 78 years old, and 
recently my mother and father and I jumped out of an airplane 
together, went skydiving.
    Mrs. Lewis. The word is determination.
    Mr. Greenwood. We come from a crazy family.
    I would like to address a question to Dr. Braun. In your 
testimony, I think that the following is a direct quote. You 
say, ``If legislation is pushed through too quickly, before 
there has been a thorough examination of the effect on 
beneficiaries and the program, and before there is an emerging 
public judgment about the changes, this would be a very serious 
mistake. In such a circumstance, we would be compelled to alert 
our members to the dangers in such legislation and why we could 
not support it.''
    And I commend you for recommending to the Congress that we 
take a very deliberative approach to this very, very critical 
issue. In fact, I think in response to a question you said that 
we need several more hearings, many more hearings to work this 
out, and that may be the case.
    That being so, there is an effort afoot in the House to 
discharge from committee consideration the Allen-Waxman bill, 
which would essentially say to this subcommittee and to the 
full Commerce Committee and to our counterparts on the Ways and 
Means Health Subcommittee and their full committee, ``Stop 
thinking about it, stop deliberating, stop bringing witnesses 
from the AARP or anyone else forward to really hone your 
judgment on this.'' Just yank the bill out of committee without 
consideration, wipe your hands of it, and throw it out on the 
floor for what I think would be a very politicized vote and not 
worthy of the greatest deliberative body on earth.
    Having said all that, would you then agree that that would 
be a precipitous thing to do, and meet your test of pushing 
something through too quickly?
    Ms. Braun. Well, I am not all that savvy on the politics 
end of the situation, but I think we certainly stand with our 
judgment that there does need to be a full debate, and that no 
debate on anything that is being suggested should be hindered. 
And we do need a chance to analyze bills and really see what 
their impact is going to be on beneficiaries, and that is 
really all I can say about that.
    Mr. Greenwood. Okay. Let me ask you another question, if I 
could, Dr. Braun. AARP's second largest source of revenue, next 
to membership dues, is the sale of Medigap insurance. As you 
know, in 1990 Congress required that seniors would have to buy 
down their deductibles and purchase questionable items such as 
foreign travel insurance before they are allowed to buy 
prescription drug coverage. Moreover, the drug coverage that is 
offered has 50 percent co-insurance and low benefit caps.
    Do you think Congress ought to consider changing the 
Medigap law and allowing AARP and others to sell a product that 
has a better value for seniors? We believe right now that 
Medigap is a good buy for seniors.
    Ms. Braun. I think that whole situation needs to be looked 
into, Congressman, because I think it is questionable. Those 
Medigap, first of all, not everybody can get them because they 
are all medically underwritten, so once you get something wrong 
with you and need the medicine, you can't get them. But even 
when you have them, they are expensive. They are all capped, 
they have 50 percent co-payments, and the premiums are very 
expensive. So they really perhaps are not that good a buy, 
although some seniors want to feel that kind of security, and 
so they hold onto them if they can afford them.
    Mr. Greenwood. Wouldn't you say that that speaks to the 
need to take a relatively comprehensive look at the structure 
of Medicare, including Medigap, before we just sort of glom 
onto a Medicare prescription drug benefit without looking at 
the foundation of Medicare that would sit below it?
    Ms. Braun. I think that is one of the problems of doing it 
separately. It would be much easier to look at the whole 
situation, and certainly nobody would welcome any more than we 
do if Congress would find a way that we didn't need Medigap 
insurance, that there wouldn't be all that much gap, so that 
people would not need that extra insurance. It does seem kind 
of strange that seniors have to have one insurance program, and 
then they have to have another insurance over that to fill in 
gaps. It doesn't make too much sense.
    Mr. Greenwood. Thank you very much.
    Ms. Braun. So it would work out better to do it with the 
whole program, but on the other hand, perhaps it will be 
possible to do it without doing the whole program.
    Mr. Greenwood. It will be possible, but maybe not 
advisable. Thank you very much for your answer to my question.
    Mr. Bilirakis. I thank the gentleman.
    Mr. Pallone, to inquire?
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask Dr. Braun a couple of questions. I guess my 
biggest concern here, and I expressed it in my opening 
statement, is that we will, or at least on the Republican side 
that they will continue to look to target lower income people 
and not have a broad-based benefit under Medicare. And you 
certainly, Dr. Braun, expressed some of the concerns about 
that, but I just wanted to dwell if I could on two aspects of 
that that bother me.
    First of all, we know that when we are dealing with any 
kind of insurance, from the point of view of the finances, the 
broader the insurance pool, the better off we are. And you, you 
know, obviously mentioned that, and I guess there are two parts 
to my question. One is if you would maybe elaborate on that a 
little more, because I think it is very important that this be 
a very broad pool.
    The other thing, though, is political, and I know you said 
you are not so much savvy about the politics, but I am going to 
venture to say as a politician that my concern about just 
addressing the problem of the lower income is also based on the 
fact that then what happens is you don't have the political 
support, if you will, that you have for a broad-based benefit 
that covers everyone.
    In other words, one of the reasons why I think that 
Medicare is so strong and that any effort to try to cut back or 
do anything that might damage it, we have such a huge reaction 
in the public, is because everybody gets coverage. All seniors 
get coverage under Medicare. And if you start to make it, any 
aspect of it, just low income based, you lose the political 
support for Medicare which I think is very important if we are 
going to continue to have it. And of course AARP is a grand 
example of that because a lot of your members, you know, they 
can be poor but a lot of them are even wealthy, I would venture 
to say.
    So I just wanted you to comment on those two aspects, one, 
the need for a broad insurance pool, and also the political 
aspect, that we don't want to undermine the support of the 
public for a program if it becomes need-based, if you would. 
And you don't have to, but I am just asking you to.
    Ms. Braun. No, I think as far as the insurance is 
concerned, any kind of insurance depends on having a very broad 
risk pool, so you have some people who aren't using and other 
people who are. We all know we carry fire insurance for our 
houses, and we hope the houses don't burn down, but there are 
enough people carrying it so that it is not terribly expensive 
and they can pay for it when it does burn down.
    And we need the same sort of thing with the insurance for 
prescription drugs. I think it is very important that whatever 
is done, we don't put a measure in Medicare which is just for 
low income. I think it is very, very important to keep the 
original plan of Medicare, which was that it would be a defined 
benefit and the benefits would be available for everybody who 
is eligible for Medicare. That is really, really important, I 
think.
    As far as the support, political support for the situation, 
that may have some value, as you are saying. However, I think 
the need is so strong in the middle income group that if we 
simply do the low income, I think you are still, Congress is 
still going to feel the pressure that people need coverage, and 
very especially when they don't have any other place to get it.
    Mr. Pallone. You know, you also talked, there was a recent 
AARP study on seniors' out-of-pocket costs for drugs, and it 
talked about the problem of access to affordable drugs cutting 
across all beneficiaries and not just the low income.
    Ms. Braun. Right.
    Mr. Pallone. Even beneficiaries with current drug coverage 
are not insulated, as you mentioned, from high out-of-pocket 
costs. For example, those with Medigap or Medicare+Choice 
coverage still may pay significantly out of pocket. Could you 
comment on that?
    Ms. Braun. Well, there are other out-of-pocket costs where 
it is not just prescription drugs. That is just a part of it. I 
think that the largest part actually is the premiums, but there 
are--anything that is not covered by Medicare, the seniors are 
going to have to get separately, and glasses and hearing aids, 
all of those things are not covered and they can be very 
expensive, so----
    Mr. Pallone. I mean, the point is, we are getting a 
situation, like with Medicare+Choice, where not only are 
premiums being charged where they weren't before, but the out-
of-pocket costs, you know, co-payments and all those other 
things are going up.
    Ms. Braun. Yes. They are capping the drug costs in a lot of 
cases where they didn't cap them before----
    Mr. Pallone. I think that is why----
    Ms. Braun. [continuing] and the 50-50 costs for them also 
adds to the costs.
    Mr. Pallone. Someone told me that there is almost no plan 
anymore than doesn't provide some premium, you know, that the 
option of not having premium has almost ceased to exist.
    Ms. Braun. Yes, almost, that is very true.
    Mr. Pallone. Thank you.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. Thank you. I thank the gentleman.
    Dr. Coburn, to inquire?
    Mr. Coburn. Thank you.
    Mrs. Lewis, thank you so much for sharing your medical 
history with us. I think it is very important. I have a lot of 
patients very similar to you, and they are really a joy to be 
around.
    I want to ask you a question. Your osteoporosis is measured 
by getting a bone densitometry. How often do you get that test?
    Mrs. Lewis. The past several years I have had a bone 
density scan once a year. However, I had a fall and my pelvic 
bone fractured not too long ago, and at that time, when I got 
out of the hospital and recovered up to a certain point, we 
then had another one, but that was a separate item.
    Mr. Coburn. But since you have been on your new medicine, 
your bone density has not decreased, it has actually increased.
    Mrs. Lewis. It has, minimally----
    Mr. Coburn. Minimally.
    Mrs. Lewis. [continuing] but it has increased instead of 
decreased.
    Mr. Coburn. I am making this point, is she has been on an 
effective medicine that was proven once that it was working, 
and yet Medicare paid for another bone densitometry study each 
year. Why? Not medically indicated, just it was done, and it 
was done because it was out there. Once a patient starts 
achieving a reversal, if they do, and not all do, and once you 
have established that fact on a medicine, you don't need to do 
another test.
    My point being, is we need to look at all of Medicare 
because one of the most abused tests out there today is a bone 
densitometry test, and it is being done in doctor's offices 
across the board, and people are getting charged for it, 
Medicare is paying for it, and we are taking money out of the 
Trust Fund to pay for it, and yet it is not necessarily 
indicated. And so the point is, is there is money going out of 
Medicare for something that is not necessary, where that money 
could be directed toward drugs.
    I would also raise another point, and that is, Mr. Pallone 
has sponsored a bill that focuses on subsidizing low income and 
uses private coverages, the SPICE bill. So, you know, I think 
it is important that we keep things above board.
    I also wanted to make one other point, and I wanted to ask 
Dr. Braun. My Medicare, I mean my AARP number is DOLCA027, and 
I happen to be a member of AARP, and the question I would have 
for you, whatever we do on drugs, who should pay for it?
    Ms. Braun. I think that has to be----
    Mr. Coburn. What is AARP's position on who should pay for 
that?
    Ms. Braun. I think it has to be shared, and certainly the 
beneficiaries need to share in that. I think everybody needs to 
get together, the providers, the drug manufacturing companies, 
everybody needs to get together, the government, to figure out 
how we can do this in a fair kind of way that will make it 
affordable to all beneficiaries.
    Mr. Coburn. Do you think your grandchildren and mine should 
pay for our drugs tomorrow?
    Ms. Braun. The ones who are working now? I hope that----
    Mr. Coburn. Yes, that they should pay for our drugs 
tomorrow.
    Ms. Braun. I hope that they are paying for what they will 
get eventually. It is being used certainly at the present time, 
but I really see that as an insurance, and insurance that they 
are promised health benefits when the time comes that they will 
retire. Now, goodness knows by that time how much it is going 
to cost.
    Mr. Coburn. Well, let me interrupt you, because the 
demographics don't support that at all. The demographics do not 
support that even with the benefits that we have today, that 
our children can continue to pay the rate at what they are 
paying and come anywhere close to supporting the baby boom 
generation, of which I happen to be part of. And so what I 
would like to know is, what is AARP's position on who should 
pay the additional cost? There is going to be an additional 
cost. Everybody agrees to that. Who should pay? Should our 
children and grandchildren pay for it? Where is the money to 
come from?
    Ms. Braun. I think, as I say, I think the present day 
beneficiaries certainly need to do their fair share with the 
situation where they can afford to. The low income people 
can't. I certainly think that the government, we have an on-
budget surplus fortunately now----
    Mr. Coburn. No, we don't. Now, I made that point in my 
opening statement. There is no on-budget surplus. Every bit of 
the money in the surplus for last year, this year and next year 
comes from excess Medicare payments, every penny. In other 
words, maybe we ought to think about spending less money on 
other programs so we can meet the obligations of our seniors. 
Is that a possible solution?
    Ms. Braun. That is a very difficult solution, depending on 
what programs. And I am sure no matter what program you decide, 
they are going to say you can't.
    Mr. Coburn. How about the 110,000 IRS employees?
    Ms. Braun. What?
    Mr. Coburn. How about the 110,000 IRS employees? How about 
the 100,000 Department of Agriculture employees? Is there any 
room for us to gain efficiency in the Federal Government so we 
can move resources to help our seniors with their drugs?
    Ms. Braun. I would hope maybe there is. I am sure I have no 
idea whether you need more or less----
    Mr. Coburn. I guess one of the things I would like to see 
is the AARP be a little more imaginative on where the money 
ought to come from to help our seniors.
    I see I am out of time. I want to thank you for your 
testimony. I did not mean to be combative. I appreciate what 
you all do.
    Mr. Bilirakis. Thank you, Dr. Coburn.
    Ms. DeGette, to inquire? We will go down the line. The 
gentleman from Michigan?
    Mr. Stupak. Thank you, Mr. Chairman.
    There has been a lot of discussion about the discharge 
petition, and I don't want that to be left like somehow we are 
doing this evil process to get this bill to the floor. A 
discharge petition, and I haven't been here as long as a lot of 
people, maybe 8 years, has never been successful yet. We have 
never had 218 people sign it.
    Whenever you get close to 200, the majority party, in this 
case the Republicans, would then bring some type of watered-
down bill or something that they would like, and that would be 
the answer to stem the 218 votes from a discharge petition 
being successful. So in order to have a fair and open, honest 
debate, the only place we are going to get a chance is these 
committees.
    And so this discharge petition, after 2 years a lot of us 
are frustrated. We have been on this process for over 2 years, 
trying to get this legislation or this issue before the 
Congress. So while maybe not successful in coming to the floor 
the way we would like to see it, with a full, honest, fair 
debate, at least through the discharge process we get the issue 
out front and you can see we even have a hearing.
    So I think the discharge petition and those people who had 
the courage to sign it are doing the right thing to get this 
debate moving, because I really can't understand why the drug 
companies, and it is not the pharmacists but the drug 
companies, why does a senior who has no drug coverage have to 
pay twice as much for the same prescription? I think that is 
unconscionable, I think it is a terrible thing we do, and we 
have to stop this pricing discrimination by the pharmaceutical 
companies.
    Having said all that, having said all that, doctor, I would 
like to follow up a question that Mr. Pallone was asking you 
about the access and out-of-pocket expenses and things like 
that. Older seniors and sicker seniors are more likely to have 
higher drug costs. In fact, I think it is like most seniors 
take 2.4 percent more, 2.4 times more drugs than people under 
65. But while certain seniors are more likely to have high drug 
costs, almost any senior could find themselves with enormous 
drug bills after an unexpected illness. This fact points to the 
need for a Medicare drug benefit that is available to everyone, 
not just certain groups of senior citizens.
    Dr. Braun, judging by what you have told us, it seems that 
the only way to guarantee security for those in need is to 
provide a benefit for all beneficiaries, because I believe 
everyone is getting older, illness can come at any time, 
requiring expensive drugs, and even with coverage, they have 
limited coverage, as you have indicated. Would you agree that 
the best way to proceed is with a universal benefit, be it 55-
up or 65-up? Would you agree that the best way to benefit is a 
universal benefit for all seniors?
    Ms. Braun. Yes. I think AARP has stated that we really feel 
that it should be available for all Medicare beneficiaries, but 
also that it should be voluntary so that people can keep what 
they have if they want to keep what they have.
    Mr. Stupak. And if it is voluntary, do you have any, have 
you done any studies or anything that would indicate what 
percentage of your seniors would participate in a benefit like 
this?
    Ms. Braun. I think it is going to depend on how it is set 
up. That is the problem at the present moment, and that is what 
we are going to need to look at, why these things need more 
analysis, because we really need to see what the impact is 
going to be on the beneficiary, and then we can find out from 
our members where they stand or how they feel about that.
    Mr. Stupak. And I apologize if this question has been asked 
before, but the three plans that are floating around right now, 
the President's proposal, the Stark bill which would make it 
part of Medicare, and of course the Allen bill which would stop 
the price discrimination from the pharmaceutical companies, of 
those three bills, has your organization taken a position on 
any one of those three?
    Ms. Braun. No, we haven't taken a position on any of the 
bills because we really think that they need more analysis. We 
have questions on each one of the bills that we really need 
answered, and therefore we are not in a position to take a 
position at the moment.
    Mr. Stupak. With your organization, have you prioritized 
this as one of your priorities for this Congress, or have you 
prioritized the issues?
    Ms. Braun. We are certainly very hopeful that it will be 
possible, but it does have to--you know, it does have to be 
done right, as the chairman said.
    Mr. Stupak. By ``have to be done right,'' does AARP have 
any kind of a position paper that they would like us to study 
or look at?
    Ms. Braun. Well, I think you have the principles that we 
have set up in the testimony, and those are the things by which 
we are judging each one and from which we elicit questions that 
we feel are not answered in the particular bill.
    Mr. Stupak. Other than the testimony, there is no other 
position paper or anything like that available from AARP?
    Ms. Braun. Not that I know of, but I will check that out 
for you.
    Mr. Stupak. Thank you.
    Mr. Bilirakis. Please summarize, Bart. Your time is up.
    Mr. Stupak. Thank you. I will yield back.
    Mr. Bilirakis. All right. Thank you.
    Mr. Bryant?
    Mr. Bryant. Thank you, Mr. Chairman, and I again thank the 
panel for its excellent testimony.
    What I hearing coming across from the other side of the 
aisle about this discharge petition, people around Washington 
that have been here longer than I have, and many on the other 
side have been here much longer than I have, and I think 
everybody understands what is going on with the discharge 
petition. It is a very effective tool to use politically to 
highlight an issue, and certainly something that was done I am 
sure very often 5 years ago, before the Republicans took over.
    And it can be used effectively, as I said, politically and 
also to appear legislatively to put emphasis on a point, make a 
point, I guess, but it has not been a very successful one in 
bringing bills out of the House. Again, I can only speak for 
the last 5 years that I have been here, but I am sure there was 
not much success when the Republicans tried the same tactic 
when the Democrats were in control for the 40 years or so 
before that.
    So let's just lay that on the table, and I think go back to 
the idea that this is a very important issue and one that no 
one, neither side I think really wants to be ramrodded or 
pushed too quickly into trying to achieve a solution, which we 
all want to do. Medicare is a very important piece of 
legislation I think that has been a success, and when we start 
talking about adding to it, which we all think is necessary 
here with a drug benefit, we want to do it right. I think the 
panel agrees, and I am sure everyone in this room agrees to 
that. So let's don't, in the interest of politics and because 
this might be a good campaign issue in November to help retake 
control of Congress or help keep control of Congress, let's 
don't rush to a judgment, if you will, in this case.
    We hear something about price controls. I think some of the 
legislation that has been offered in effect amounts to price 
controlling, and I think that most of us here understand that 
does not work very effectively, and certainly in this 
environment of prescription drugs has the potential to really 
chill the research and development. The drug that Mrs. Lewis 
testified about that has so greatly helped her, that could--no 
telling how many drugs that are like that out there right now, 
yet to be discovered or that are in the pipeline of being 
discovered, that could be affected by such measures as price 
controls.
    But I guess in the end I did want to ask Mrs. Lewis a 
question about your particular case. You have testified, I 
think, that your drug bill averages about $600 a year. Do you 
know how much of that actually comes out of your pocket, or is 
that what you pay out of your pocket?
    Mrs. Lewis. That is what I pay out of my pocket.
    Mr. Bryant. So your total drug bill is higher than the 
$600?
    Mrs. Lewis. Yes. There are other things that occur from 1 
year to another. That means other prescriptions, but it is not 
those that I take every week.
    Mr. Bryant. That would be your premium combined with any 
co-payments you have----
    Mrs. Lewis. Right.
    Mr. Bryant. [continuing] that would total about $600?
    Mrs. Lewis. Exactly.
    Mr. Bryant. The insurance company picks up, I guess, a 
larger portion of your drug, prescription drug bill?
    Mrs. Lewis. Yes, I am sure they do. It is a lot more.
    Mr. Bryant. Well, the reason I was drawn to that $600 
figure is because that was very close to the example that I 
used in my opening statement in alluding to the President's 
proposal that is on the table.
    Mrs. Lewis. It wasn't taken from there.
    Mr. Bryant. Right. Well, I wanted to graphically use you as 
another example of that, realizing that the President's bill is 
not necessarily going to be one to pass out of here, and 
realizing that it is not mandatory; that, you know, whatever 
comes out probably is going to be optional.
    But whatever comes out, whether it is the President's bill 
or something else, is going to kind of set the standard, 
because I think what we see is the private sector will 
eventually evolve around maybe to where the government would be 
in this Medicare benefit, and you might have people dropping 
their coverage for their retirees so they can go to the 
government program.
    So what we pass out of here realistically could set the 
standard, and I am still concerned about the President's bill 
where it would cost, on that average of $600 a year, it would 
actually cost a person more money to be on that program when 
you add up the premium of about $302 a year, together with a 50 
percent co-pay on every prescription drug they buy. And at this 
point it doesn't seem to have a stop-loss provision. I know he 
has talked about adding some dollars to this plan, but not 
really defining yet, to my knowledge, what type of stop-loss or 
ceiling he would set where you wouldn't have to pay anything 
beyond that.
    But it is an expensive plan, and I think as the American 
people learn about the President's plan, they are not going to 
be happy with it. And I still think that we as a Congress can 
simply do better, and I think that is the purpose of this 
hearing, is finding out, listening to what you have to say so 
we can do a better job than that, than his plan.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Bryant. And I would yield back.
    Mr. Bilirakis. Thank you, Mr. Bryant.
    Mr. Dingell, to inquire?
    Mr. Dingell. Thank you, Mr. Chairman.
    Mrs. Lewis, welcome. Thank you for being here. I am not 
clear from your statement. Are you for or against having 
prescription pharmaceuticals covered by Medicare?
    Mrs. Lewis. I think it should, but I don't know where it 
stops. I don't know what the extent of it would be.
    Mr. Dingell. I see. Now, you haven't told me yet whether 
you are for or against. You say you think it should be but you 
don't know where the expense stops. That last part of your 
statement doesn't mean that you are against covering 
prescription pharmaceuticals under Medicare, does it?
    Mrs. Lewis. To tell you the truth, I hesitate to give an 
answer to that because I don't feel I know enough.
    Mr. Dingell. Okay, so you don't know whether you are for or 
against covering prescription medications in Medicare?
    Mrs. Lewis. Well, I prefer to have Medicare.
    Mr. Dingell. I still don't understand what you are telling 
me. There are a lot of senior citizens who don't have the kind 
of plan you have, and who don't have prescription 
pharmaceuticals covered. Do you think they should have their 
prescription pharmaceuticals covered or not?
    Mrs. Lewis. I think it should be covered by Medicare.
    Mr. Dingell. Ah, good. Thank you. Now, is your plan a 
nationwide plan, or is it one which is just peculiar to your 
area or to your State?
    Mrs. Lewis. It is not throughout the country. It just 
happens to be something that we have a great many companies 
like this one.
    Mr. Dingell. In California?
    Mrs. Lewis. Yes.
    Mr. Dingell. And they offer coverage only in California?
    Mrs. Lewis. I don't believe so.
    Mr. Dingell. Is this a plan where the premiums are paid for 
under Medicare?
    Mrs. Lewis. No.
    Mr. Dingell. So the premiums, then, for the plan that 
covers you and offers you prescription pharmaceuticals, is not 
within the--is not covered----
    Mrs. Lewis. It comes out of my Medicare.
    Mr. Dingell. [continuing] or the benefits are not made 
available because of payments from Medicare. Is that right?
    Mrs. Lewis. Yes, it does.
    Mr. Dingell. I am not quite sure I understand.
    Mrs. Lewis. It does come from Medicare, a certain portion.
    Mr. Dingell. So Medicare pays the premiums for the plan 
that you have; is that what you are telling us?
    Mrs. Lewis. Yes. My husband explained it in this fashion. 
Medicare is taking care of a certain portion for individuals. 
They are paying the insurance companies to give me some----
    Mr. Dingell. How much do you pay in addition to what 
Medicare pays for the plan that you have?
    Mrs. Lewis. I pay----
    Mr. Dingell. So Medicare pays a part of the premium and you 
pay a part of the premium?
    Mrs. Lewis. Yes.
    Mr. Dingell. How much do you pay a month?
    Mrs. Lewis. I pay $15 a month.
    Mr. Dingell. In addition to what Medicare----
    Mrs. Lewis. In addition to Medicare.
    Mr. Dingell. Okay. If you didn't have prescription 
pharmaceuticals covered, you would have a pretty serious 
problem, wouldn't you?
    Mrs. Lewis. Yes, I certainly would. As it happens, I will 
admit to you that I don't pay taxes, we don't pay taxes, so you 
know approximately what our income is.
    Mr. Dingell. So having said that, I am trying to 
understand, if a senior in another part of the country doesn't 
have the availability of a plan of this kind, that senior is in 
some substantial difficulty, isn't he?
    Mrs. Lewis. My husband is reminding me that prior to being 
with this company, my drug bills came to about $1,500 a year.
    Mr. Dingell. Well, I am pleased that you have found a way 
to resolve this.
    Mrs. Lewis. I am very grateful, too.
    Mr. Dingell. Mr. Chairman, I thank you.
    Mr. Bilirakis. I thank the gentleman.
    Let's see. Dr. Ganske?
    Mr. Ganske. Thank you, Mr. Chairman. So many questions, so 
little time.
    Thank you, Ms. Lewis, for being with us. I am over here. 
Thank you very much for coming.
    Mrs. Lewis. You are very welcome.
    Mr. Ganske. Dr. Braun, I thank you also. I received an 
interesting letter from a constituent who I will not name, or 
the FDA may go after him, but he says that he got a 
prescription from his doctor and the cost was $2.43 per pill. 
Then he started to look through the internet, and he found the 
following.
    He said, ``I can order through Pharmaworld in Geneva, 
Switzerland, after paying either of two American doctors $70 
for a phone consultation, a price of $1.05 per pill. I can 
order through Canadian pharmacies''--see attached letter--``if 
I use a doctor certified in Canada, or my doctor can order it 
on my behalf through his office for 96 cents per pill, plus 
shipping. I can send $15 to a Texan''--and he encloses a 
letter--``and get a number at a Mexican pharmacy who will send 
it without a prescription and it is priced at $52 per 100 
pills.''
    Now, it so happens that when we passed the North American 
Free Trade Agreement, the one thing that our own government 
blocks our consumers from getting across the border is 
prescription drugs, although obviously there are senior 
citizens who are going through the internet and doing this at 
50 percent off. I mean, I hear this from all of my colleagues 
along the Canadian border and along the Mexican border. We have 
examples of people just going over and getting their 
prescription drugs at significant discounts.
    Does AARP have a position on whether, if we address this 
pharmaceutical benefit problem, we should change the law to 
allow senior citizens to shop across the borders to fill their 
prescriptions?
    Ms. Braun. I don't believe that we have. That would only 
advantage people who lived close enough to the border to be 
able to go back and forth.
    Mr. Ganske. Not necessarily, because you could live--this 
gentleman lives in Des Moines, Iowa, right in the middle of the 
country, and he can do this through the mail.
    Ms. Braun. Through the net, yes.
    Mr. Ganske. So, has AARP taken a position on that?
    Ms. Braun. We haven't taken a position. We have some 
concerns that the FDA has also, to be sure that the packaging 
and the warnings and the drug was the same in the first place, 
so there are I think a lot of questions from that point of 
view, but we haven't taken a position on that one way or the 
other.
    Mr. Ganske. Is AARP going to take a position on that issue? 
Are you looking at----
    Ms. Braun. I don't know. We have certainly discussed it 
and, like you, we have gotten questions from our constituents 
or, you know, our members, wanting to----
    Mr. Ganske. Well, I hear this from my constituents all the 
time, and they are all AARP members.
    Ms. Braun. And it is a concern, of course. Yes. Of course, 
the other thing, fortunately lots of seniors are using the net, 
but there certainly are an awful lot of them that wouldn't know 
how to go about that at all.
    Mr. Ganske. That is true.
    Ms. Braun. So this person is very fortunate.
    Mr. Ganske. So this is something AARP is looking at?
    Ms. Braun. Yes.
    Mr. Ganske. As a recommendation?
    Ms. Braun. Yes. Our members have asked that we----
    Mr. Ganske. Changing our FDA regulations?
    Ms. Braun. Yes. Our members have asked that we look at it, 
and we started to consider it this year, and it is going to be 
considered.
    Mr. Ganske. Have you received a lot of requests from your 
members to look at that issue?
    Ms. Braun. We have. Yes, we have received requests.
    Mr. Ganske. Okay. Now, let me get into the issue of 
funding. According to a recent CBO report, Congressional Budget 
Office report, if we followed 1997, the Balanced Budget Act, we 
would see in the next 10 years roughly about $1 trillion in 
surplus above and beyond Social Security, and we have said we 
are going to keep that Social Security account separate. The 
second assumption was--that is if you keep 1997 BBA and there 
is no emergency funding. That is about a trillion in surplus.
    The second scenario is, if you would just freeze spending 
at today's level, then you would get about roughly a $600 
billion surplus over 10 years. The third scenario from the CBO 
was that if you increased spending according to a cost-of-
living allowance and you factored in average emergency funding, 
you would have about $300 billion in projected surpluses.
    Now, we just passed a bill in Congress that, if it became 
law, would eat up $182 billion. That is the marriage tax 
penalty. And we are also very concerned about increasing 
coverage for the uninsured, for health insurance. So let's just 
say that we increase, let's take the third scenario. We have 
got $300 billion----
    Mr. Bilirakis. Please speed up your question so we can get 
a quick response to it.
    Mr. Ganske. Okay. We have got $300 billion in surplus, or 
say $400 billion, and we have got some tax relief in there that 
eats up half of that. Okay. That leaves us with say $200 
billion. We have also got a problem with Medicare as it 
currently exists in a few years not having enough money.
    So my point is this: How much of what is probably a real 
surplus should we devote to a pharmacy benefit, No. 1, just as 
a percentage?
    Mr. Bilirakis. I am sorry, Greg, but you are taking 
advantage of----
    Mr. Ganske. Excuse me, Mr. Chairman. I will finish this 
real soon.
    And, second, how much of that should go to--how much, what 
percentage should senior citizens contribute to that pharmacy 
benefit?
    Mr. Bilirakis. The gentleman's time has expired. Do you 
have a quick answer to that, Dr. Braun?
    Ms. Braun. Yes. I think AARP does support using some of 
that amount to support Medicare, to support prescription drugs 
being covered. As to the exact figures, I am----
    Mr. Ganske. Would senior citizens be willing to assume 50 
percent of the cost----
    Mr. Bilirakis. The gentlelady----
    Mr. Ganske. I only want to know about percentage----
    Mr. Bilirakis. The gentlelady from Colorado is recognized.
    Ms. DeGette. Thank you, Mr. Chairman.
    I would like to talk with you, Dr. Braun, for a couple of 
minutes about some of the proposals that we have been hearing 
about to provide drug benefits to seniors through State 
prescription programs. Are you aware of these types of 
programs, doctor?
    Ms. Braun. Yes.
    Ms. DeGette. Do you know whether they are available in all 
of the States?
    Ms. Braun. No. Actually, they are available in very few 
States, and I think it was something like 14, maybe now up to 
17 at this point, but it is certainly not even a majority.
    Ms. DeGette. Thank you. And something I have been a little 
bit concerned about is that if we use a block grant type 
approach, all States may not adopt this benefit right away. For 
example, Arizona didn't create a Medicaid program until 1985, 
which was 20 years after the program was authorized by 
Congress. And I am wondering if you see this as a potential 
hazard if we go to a State-based scenario?
    Ms. Braun. Yes, I think we do have that concern. I think 
the chairman himself has that concern about his own. I won't 
put words in his mouth.
    Ms. DeGette. Let me ask another question, which is the GAO 
study I think we are going to hear about on the drug benefits 
currently available to seniors, including the State pharmacy 
benefit programs. GAO found that there is an enormous amount of 
variability among the State-based programs, and the deductibles 
in these programs could go from zero to $640. Have you found 
that to be an issue?
    Ms. Braun. Yes, that is a major problem, just as it is in 
Medicaid.
    Ms. DeGette. And what is AARP's position on block grants in 
general in the pharmaceutical arena, to States?
    Ms. Braun. I think that is one way of taking care of the 
very low income, but certainly not, you know, our preferred 
way, which would be to be sure that everybody has the benefit.
    Ms. DeGette. Thank you. Mr. Chairman, I just would like you 
to indulge me for a moment. I, even though I didn't hear Mrs. 
Lewis testify, I read her testimony, and I think it is very 
useful to have beneficiaries come in and actually talk to us 
about what is going on.
    I was a little dismayed when I heard her tell Mr. Dingell 
that she and her husband are on a fixed income and don't even 
have to pay taxes, and I am sure it was very expensive for them 
to fly here from California and to stay at a hotel and come and 
testify. I am wondering if, using the chairman's prerogative, 
we could agree that the committee could find some way to pay 
their travel expenses here today so they wouldn't have to pay 
for this?
    Mr. Bilirakis. Well, I really can't respond to that in a 
way that you would prefer because, you know, there is 
precedent. I honestly don't even know what the arrangements 
were that were made. Staff would know. So we will look into 
that.
    Ms. DeGette. If we can help----
    Mr. Bilirakis. I very much appreciate your concern.
    Ms. DeGette. [continuing] I would like to help out in any 
way we can. Thank you, and I will yield back the balance of my 
time.
    Mr. Bilirakis. Thank you.
    Mr. Bilbray?
    Mr. Bilbray. Thank you, Mr. Chairman.
    Doctor, I really appreciate your candor about, you know, 
where we go from here on this issue, because I think AARP, you 
know, could take the easy route and say, ``Well, just spend 
more money on this program, don't look at the comprehensive 
repercussions.'' And I appreciate the fact that you realize and 
are willing to stand up and say spending just more money is not 
always the answer. We need to look at how it affects the whole 
thing.
    Ms. Braun. We have children and grandchildren, too.
    Mr. Bilbray. And I really, I just think that, hope that 
some of us on both sides of the aisle are willing to take that 
responsibility on in saying it isn't as simple as we would like 
to say. It is not a 30-second sound bite, even if it is an 
election year. So I think that we can develop that bipartisan 
support on this issue following your leadership, and I think 
that is critical.
    Mrs. Lewis, I understand that you have been enrolled in a 
Medicare health maintenance organization for 16 years.
    Mrs. Lewis. That is correct.
    Mr. Bilbray. Can you tell the committee--and I need to 
preface this by saying, Mr. Chairman, in my community in San 
Diego, almost 60 percent of seniors are on some kind of health 
maintenance program, and so this is at least one community 
where we have seen the private sector step in and actually 
provide some great options. At least that is what I hear from 
my constituents, and I know that isn't available in other 
places.
    But, Mrs. Lewis, can you explain to the committee how you 
first selected this kind of coverage, first of all?
    Mrs. Lewis. It is kind of a personal message.
    Mr. Bilbray. Yes. Can you tell us how you found out about 
it? You know, how did this----
    Mrs. Lewis. A neighbor in the area that we lived in at that 
time told me what this particular company offered, and it 
sounded too good to be true, but it proved to be true. I can't 
give you figures. I have no way of knowing exactly what it may 
cost them above and beyond what I pay. I don't know. I just 
know it is very comfortable.
    Mr. Bilbray. So if you were not in a situation where you 
were talking to your neighbors, where you had that kind of 
community communication, you may not have ever known about this 
program?
    Mrs. Lewis. It is possible. I believe that there were 
articles in the newspaper at that time, but I hadn't read it.
    Mr. Bilbray. Your recommendation, at least that we should 
be looking at this type of option being made available for all 
seniors as much as possible----
    Mrs. Lewis. Yes, I do.
    Mr. Bilbray. [continuing] why do you make that 
recommendation, again?
    Mrs. Lewis. I would make the recommendation because it is 
the perfect situation for my husband and I. I don't know about 
other people and how they run their homes and what their income 
is. It is not any of my business.
    Mr. Bilbray. The ranking member of the full committee 
pointed out that with this private program, in cooperation with 
the public support that we give Medicare+, we were looking at, 
what $45 a month plus $15 of your own money a month for the 
Medicare+Choice?
    Mrs. Lewis. And $5 a visit to a doctor.
    Mr. Bilbray. $5 to $10 co-pay.
    Mrs. Lewis. Right.
    Mr. Bilbray. And with your limited income, you can maintain 
that financial participation in the program?
    Mrs. Lewis. We manage it.
    Mr. Bilbray. Okay. Doctor, I know this is a tough one for 
you because I know that you have to confront your own internal 
politics of the AARP. We all have our internal politics. Does 
it really seem like it is impossible for us to make this kind 
of choice and this type of participation in the choice 
available to all seniors through either a private or a public 
program?
    Ms. Braun. Do you mean making HMOs available all over the 
country? Is that what you are saying?
    Mr. Bilbray. Not just HMOs, but let's just say this 
cooperative effort. The Congressman, the doctor was talking 
about the fact that how much participation would AARP be 
willing to have the seniors involved, and I think that we maybe 
here have a prototype to at least look at, that here is seniors 
with limited income who are participating in a program, and 
frankly I think to a degree a bit of pride that they are 
participating in the program. It is not just being given to 
them. It is not just coming from their grandchildren and 
children. Is there any possibility that AARP could support at 
least looking into this strategy and having it, either public 
or private, having seniors participate at this level?
    Mr. Bilirakis. A short response, please, Dr. Braun, if you 
can.
    Ms. Braun. I still am not quite sure what you are talking 
about, but I think it is wonderful where it is available, but 
it is not available in a great many places, and probably never 
will be in rural areas.
    Mr. Bilbray. Mr. Chairman, my question was, though, if it 
was available, would you support requiring seniors to 
participate at this level in the financing formula?
    Ms. Braun. In the financing formula?
    Mr. Bilbray. Yes.
    Ms. Braun. Sure.
    Mr. Bilbray. Okay. Thank you very much. I appreciate it. 
Thank you, doctor.
    Mr. Bilirakis. Mr. Barrett?
    Mr. Barrett. Thank you, Mr. Chairman, and I do thank you 
for holding these hearings. I think they are very beneficial.
    I feel compelled to address some of the questions or the 
implicit questions that were posed by several Members who are 
no longer here, from the other side. And the first one dealt 
with a question that was posed to Dr. Braun, as to asking you 
to choose between Medicare coverage prescription drugs or 
cutting some other government service. It was presented, at 
least as I heard the question, it was presented that these were 
the only two options, that you were either going to get this or 
we are going to have to cut some--if you were going to get 
this, we were going to have to cut some other service.
    I think that we have to put that notion to bed right away 
because, as Mr. Ganske indicated and others indicated, we have 
passed legislation conferring tax breaks on married couples, 
some who suffer a marriage penalty, others like myself who have 
a marriage bonus. And the decision was made that that was an 
easy choice to make, that we could have a tax cut for $182 
billion that would benefit, a lion's share of those benefits 
would go to wealthier people.
    So I just want to make sure that we understand that we are 
not just talking here about services versus Medicare benefits, 
that there is another factor in here, and that is tax cuts and 
who is going to benefit from those tax cuts. And so if we are 
going to have an honest debate, I think that that has to be 
included in that debate.
    The other question that was posed or implicit question that 
was posed, one of my colleagues talked about the price 
controls. Now, I infer from his statement that he was talking 
about Tom Allen's bill, and I want to address that head-on 
because there is absolutely nothing, absolutely nothing in that 
bill that sets price controls. The prices are set by the 
pharmaceutical companies in conjunction with the HMOs or the 
Federal Government, whoever they are bargaining with.
    They drive a bargain between themselves and their preferred 
customers. What the Allen bill does, it says once you 
pharmaceutical companies, once you have set that price, then 
you can't discriminate, and for many of us that is a very, very 
important notion, that seniors--and I don't think that there is 
anybody in this room that would dispute the fact, and I 
emphasize the word ``fact,'' that seniors in this country who 
are not in HMOs, who do not have insurance plans, pay 
significantly higher amounts for those drugs than anybody else 
basically in this world, that American seniors are hit harder 
than anybody else, certainly than anybody in this country.
    My concern, as we debate this issue and we move toward a 
discussion as to whether Medicare should cover prescription 
drugs, is if we simply take the current pricing mechanism that 
is out there, the current marketing practices, and plop them 
from where they are and plop them into Medicare, we have not 
addressed, we still have not addressed that issue of price 
discrimination against seniors. All we have done is said, 
``Well, seniors will still be discriminated against, but rather 
than coming out of their own pocket, it is going to come out of 
the government's pocket.''
    And I think for the pharmaceutical companies that is just 
fine. If they can continue to have that price differential, 
they don't care who is paying for it. If it is seniors, fine; 
if it is the government, that is fine, too. But I get more 
sympathetic to some of the questions from some of my colleagues 
who are concerned about the cost of the Medicare program, 
because I think if we have a plan that simply shifts the 
current marketing system into Medicare and don't do anything 
about this price discrimination, that eventually it is going to 
weaken the system.
    The question I have for you, Dr. Braun, is along the lines 
of the questions that I think again Mr. Ganske was posing. I 
would like to see the AARP be more aggressive in saying, ``We 
want freedom of choice for our constituents,'' for your 
constituents; that if these drugs are being sold in Canada at a 
lower price, if they are being sold in Switzerland at a lower 
price, if they are being sold in Mexico at a lower price, well, 
freedom of choice, everybody loves freedom of choice. If we are 
talking about how bad it is to put price controls on companies, 
it is also bad to put purchasing controls on purchasers, and we 
should take those off as well. Then the free market can just 
run wild.
    So I would ask you to reconsider or to consider more in 
depth the position that your organization takes, because I 
think that that will help move this debate forward.
    So, having said that, Mr. Chairman, I would yield back the 
time.
    Mr. Bilirakis. Thank you very much.
    Mr. Lazio, to inquire?
    Mr. Lazio. I am not going to ask any questions. The only 
point I want to make, and it is partly in response to my 
colleague, Mr. Barrett, is that if every senior was in a PBM, 
they would all have the benefit of that leverage or that market 
leverage. All of them would be able to participate in lower 
prices. And so there are market mechanisms short of mandates 
that would help drive prices down and give all seniors the 
benefits that seniors who have Medigap policies, that they 
enjoy or that their insurance companies enjoy or that their 
employers enjoy.
    And with that I----
    Mr. Barrett. If the gentleman would yield----
    Mr. Lazio. Yes, I am happy to yield to the gentleman.
    Mr. Barrett. And I understand what you are saying and I 
agree with it, but I think that almost by definition, the most 
vulnerable and most isolated seniors are the ones that are 
least likely to be attracted to those market mechanisms. And 
just as the chairman was, I think, asking some legitimate 
questions as to shouldn't we be helping the most infirm and the 
sickest first, I think that we have to recognize that the very 
people who are least likely to join those organizations are the 
ones that are going to be the most vulnerable ones that the 
chairman was speaking of.
    Mr. Lazio. Reclaiming my time, we can create a structure, 
an infrastructure that provides the right incentives so that 
all seniors can and will and will want to participate in that 
kind of market-related mechanism. It is just a question of 
whether we are going to embrace the market system or we are 
going to look for, in my opinion, look to a mandated approach 
that will have a good deal of unforeseen consequences for 
seniors, especially during this time of sort of a wild 
technological explosion.
    I love to talk to kids when they come to Washington, 
because I say, ``I envy you, the things that you will see in 
your lifetime, the creativity, the innovation, the discovery.'' 
I mean, this is the age of biological discovery. I just hope 
that whatever we do does not hamstring our ability to continue 
to explore the ends of the envelope when it comes to those 
biological discoveries.
    Mr. Pallone. Could I ask the gentleman to yield? This goes 
back, I think it is part of what you were getting at and part 
of what Mr. Bilbray was getting at, but I was confused when Mr. 
Bilbray asked Dr. Braun this question or Mrs. Lewis this 
question about mandates.
    Was he suggesting that, when he was asking you, was he 
asking whether or not you would support mandating, if you will, 
that every senior pay a certain amount the way Mrs. Lewis is? 
Or was he actually saying that he thought there should be some 
sort of mandate that seniors should have to participate in 
managed care? It wasn't clear to me, and I was just wondering 
maybe if you would clarify that. Is it your position that you 
think that every senior should be forced to pay a certain 
amount, or would you favor that every senior would be able, 
should have to participate in managed care? I was just confused 
about the question and maybe how you responded to it.
    Mr. Lazio. Let me just, because I don't have all that much 
time, and I would be happy to yield if we have time, but it 
also matters who controls the formulary. If the government 
controls the formulary, if the government controls what type of 
pharmaceuticals are going to be available at what cost, we are 
going to have, in my opinion, some significant distortions to 
the market that will have impact on discovery and innovation.
    So, you know, it is a broader question I think in a sense 
than just should seniors be in some form of PBM. But----
    Mr. Greenwood [presiding]. If the gentleman would yield on 
that----
    Mr. Lazio. [continuing] you know, in other words----
    Mr. Greenwood. Excuse me. The gentleman has yielded to the 
temporary Chair. I also would like to comment about some of the 
rhetoric that is used here.
    There is no discrimination against seniors for prescription 
drug benefits, for prescription drug products. There is an 
experience that anyone of any age has when they walk into a 
drug store and buy one product at a time, retail, without 
benefit of having a plan to pay for them. That is what happens 
in the retail market, whether you are buying bicycles or drugs.
    What we are trying to do is create a system so that seniors 
get the benefit of group purchasing leverage, so that they can 
enjoy those kinds of reductions in prices and that we can 
subsidize the cost of what they do have to pay. But I think we 
ought to, if we are going to be truly bipartisan and get beyond 
some of the rhetoric here, we ought to stop this rhetoric as if 
somebody is discriminating against seniors. We want to get 
seniors out of the one-by-one retail market and put them in a 
group plan.
    And I will recognize Ms. Eshoo for inquiry.
    Ms. Eshoo. Thank you, Mr. Chairman, and thank you to both 
of the witnesses that make up our first panel.
    First I have some observations and then I have a question. 
I think that what has come from you to the members of this 
committee today is that a universal system is important. That 
is what Medicare is as an insurance policy for the seniors of 
our country, so the issue of should it be for a handful, should 
it be for this group or should it be for that group, should we 
segment the market, I think that as far as AARP is concerned 
you have laid that to rest. You are saying that we need a 
universal system.
    We understand that Medigap insurance policies can be 
expensive. I know in my own experience in paying for that 
coverage through AARP for my mother and father, I started out 
in the mid-eighties at $35 a month for the two of them, and the 
year that my father died, which was 2 years ago, it had gone up 
to close to $300-plus for the two of them. That is my own 
personal experience. I still thought that it was a pretty good 
buy because we couldn't get it anywhere else.
    We know that there has been a reliance on the private 
insurers, i.e. the health management organizations, the HMOs, 
that they are not obligated to remain in a geographic area, nor 
are they obligated to keep up with the promise that they may 
have first offered to those in order to bring them in to their 
insurance organization. In the Bay area, the San Francisco Bay 
area, which is a known area throughout the country, it is an 
area where the economy, the ground is on fire, we are doing so 
well. And yet insurance company after insurance company has 
pulled out of the market, and so what Mrs. Lewis enjoys, many 
of the seniors that the Bay area delegation represents, they no 
longer enjoy those benefits because the insurance companies 
have pulled out of the market.
    And with regard to the issue of reforming Medicare before 
we offer another benefit, I would like to place something else 
on the table. This is a reform that we are talking about here. 
This is a very important reform to the system because no one 
would design a system today without prescription drug coverage. 
What was a part of the system in 1965, where they had surgical 
coverage, in-hospital coverage was a must then. Prescription 
drug coverage is a must today.
    I think that once again the people of our country are ahead 
of our government. They know that this is something that should 
be a part of this system. In listening to you, Dr. Braun, I 
want to urge you to take back to the AARP and its respective 
policy committees, to come back to the Congress with what you 
see is the best way of structuring this; not whether we should 
have it, not whether we shouldn't. I think that all of these 
things, most frankly, all of the Members, regardless of their 
party, regardless of where they are, for the most part anyway, 
in terms of their ideology, we know that we need to provide 
this.
    And to ask AARP to figure out our budget I think is unfair, 
but I think we do need to look at how the best way this should 
be constructed, because there is a 500-pound gorilla in the 
room but no one wants to take a look at it. The pharmaceutical 
companies do not want HCFA to do the administrating. We know 
that. I mean, I don't know how many people have said it here, 
but they don't want that because they are hearing that there 
will be price controls, and let's put it right out there. There 
are other models to take a look at. I don't know which way you 
may go, but I think it might be a worthy exercise for AARP to 
take a look at it.
    The one consistency in all of this is that seniors indeed 
do use drugs, legally, and that they are increasingly paying 
more and more out of their pocket for that. Too many are having 
to make an awful choice between their rent, food, other 
necessities, on fixed, rather low incomes, and we need to do 
something about this. So I would ask you to go back to your 
policy committee and do some examination of which system you 
think would work better, or the combinations thereof.
    Now, my question. Some of the proposals that have been 
introduced would allow plans to vary the benefits that seniors 
get. For example, HMOs would be allowed to tailor the drug 
benefit however they wanted. Some might choose to put high co-
payments on certain drugs; others might choose not to cover 
certain drugs at all. Could you comment, Dr. Braun, on why you 
think it is so important----
    Mr. Greenwood. The gentlelady's time has expired.
    Ms. Eshoo. And she is going to answer, which has not 
expired.
    Mr. Greenwood. No. I'm afraid the gentlelady's time has 
expired.
    Ms. Eshoo. Oh, Mr. Chairman, we are all spending a lot of 
time here today. I mean, 30 seconds, can I ask the committee 
for 30 seconds?
    Mr. Greenwood. Certainly you can ask. We will yield you the 
additional 30 seconds.
    Ms. Eshoo. Thank you.
    Could you comment, Dr. Braun, on why you think it is so 
important to ensure that Medicare provides a defined benefit?
    Ms. Braun. I think we need the defined benefit so that, if 
we bring competition into the field, you really need to know 
what you are competing on. And therefore I think, you know, we 
do need to have a defined benefit in the program.
    Ms. Eshoo. Thank you.
    Mr. Greenwood. The gentleman, Mr. Strickland, is recognized 
for inquiry.
    Mr. Strickland. Thank you, Mr. Chairman.
    I took note of the accurate point that seniors are not 
discriminated against in a technical sense in drug pricing, but 
the fact is that more seniors in this country are more likely 
to be ill and need more medications, and so in a practical 
sense they are the part of our population that bears the brunt 
of this price discrimination. It is not only directed toward 
seniors, but seniors bear a disproportionate burden for that 
price discrimination than any other sector of our population, 
so I think in a practical sense we can say seniors are being 
discriminated against in the way drugs are priced.
    I have heard references to price controls today, and many 
of my colleagues who tout the world economy I think probably do 
not recognize the fact that all the other countries have price 
controls of one sort or another on prescription drugs, so once 
again it is the American consumer that is bearing the brunt of 
what we say is necessary in terms of pharmaceutical profits in 
order to carry out the research to bring new and better, more 
effective drugs on stream. The fact is that the American 
consumer is being treated grossly unfairly in the way these 
drugs are being priced.
    And the third thing I would like to say to our honored 
guests here today is that I represent an area in southern Ohio 
that is a very poor Appalachian area, and I encounter on a 
weekly basis seniors who would give everything they have, which 
may not be very much, to have access to the kind of benefit 
plan that you described in San Diego. And I am very sorry that 
I was not here when you gave your testimony. I have read it, 
and I am anxious to find out how such a generous benefit could 
be available and still allow whoever is providing it to be 
financially solvent.
    But I want to thank you for being here. I think you both 
have contributed greatly to our understanding of this problem.
    Mr. Barrett. Would the gentleman yield?
    Mr. Strickland. Yes, I would.
    Mr. Barrett. I just want to respond to the chairman on my 
statement using ``discrimination'' and make it very clear what 
I meant. The current marketing system has a much greater 
discriminatory impact on seniors, who disproprotionately are 
not covered by health plans that help pay for the cost of 
prescription drugs. The intent, the stated intent may not be to 
discriminate against seniors, but because seniors are 
disproportionately not covered by health care plans, they bear 
the brunt of this discriminatory marketing system. That is what 
I meant, and that is what I meant to say.
    Mr. Ganske. Would the gentleman yield?
    Mr. Pallone. Would the gentleman yield?
    Mr. Strickland. I yield to the gentleman from New Jersey.
    Mr. Pallone. I just wanted to ask the gentleman to yield 
the time that he has left.
    Dr. Braun, just again so I understand you, when Mr. Bilbray 
was asking Mrs. Lewis about--or asking you about Mrs. Lewis' 
plan and saying that he wanted to know whether you would 
support, you know, everyone being mandated to have something 
like that, it wasn't clear if he was asking whether or not we 
should mandate that everyone pay a certain amount per month, 
like she has a $15 per month co-pay or something, or whether he 
was asking if everyone should be part of a managed care plan. 
And you answered affirmatively, and I just wanted to clarify 
that, AARP's position on that.
    Ms. Braun. No, I certainly did not see it as mandatory for 
everybody to join a managed care plan. I think I was responding 
to the fact that the low costs that Mrs. Lewis has certainly 
are something that could be borne by beneficiaries, that that 
is within a normal range of what could be borne.
    Mr. Pallone. Okay. Thank you.
    Mr. Greenwood. If I may, if the gentleman would yield 30 
seconds to me, the point that I was making, Mr. Barrett, is 
that I think the word ``discrimination'' is a poor word to 
describe the phenomenon of the marketplace.
    I cannot go to Detroit, knock on General Motors' door and 
ask them to sell me a Chevrolet for the same price that a 
dealer would get the Chevrolet, because I am not buying train 
loads of them. There is no economy of scale there. So that is 
what we are confronting in the retail market. It is not 
discrimination, it is an economic fact of life that we want to 
overcome. We want to change that economic set of circumstances 
so seniors do have the purchasing power, virtually wholesale 
purchasing power, not retail purchasing power.
    Mr. Barrett. If the gentleman would yield again, just for 
15 seconds----
    Mr. Greenwood. Fifteen seconds.
    Mr. Barrett. [continuing] my point is the impact. I think 
we have to look at the impact, and I stand behind my statement 
that the impact against seniors is far more discriminatory.
    Mr. Greenwood. All right. Enough of these semantical 
battles. The Chair recognizes Mr. Waxman, who wishes to make a 
unanimous consent request for a submission to the record. Is 
that correct?
    Mr. Waxman. Yes, Mr. Chairman. I have two documents from 
AARP and another one from Leadership Council of Aging 
Organizations. I would like to have it made part of the record.
    [The information referred to follows:]

                                                       AARP
                                                   January 28, 2000
The Honorable Pete Stark
239 Cannon House office Building
U.S. House of Representatives
Washington, D.C. 20515
    Dear Representative Stark: I am writing in response to your letter 
concerning the design of a Medicare prescription drug benefit. Your 
commitment to prescription drug coverage for Medicare beneficiaries and 
long-standing leadership on this issue continue to be deeply 
appreciated.
    Like you, AARP is committed to creating a Medicare prescription 
drug benefit for all beneficiaries as a high priority in Medicare 
reform. We believe modernizing Medicare's benefit package to keep up 
with advances in medicine is a must. Because prescription drugs are 
central to the delivery of high quality health care, Medicare should be 
like most other health insurance plans and include prescription drugs 
as part of Medicare's defined benefit package offered by all 
participating plans as well as in traditional fee-for-service.
    AARP is committed to pursuing the answers to the questions you have 
raised and to continuing to advance the debate over the best way to 
assure that a prescription drug benefit that is available and 
affordable to all Medicare beneficiaries becomes part of Medicare's 
defined benefit package. We have identified some fundamental principles 
to guide the development of a Medicare prescription drug benefit:
 A Medicare prescription drug benefit must be available to all 
        Medicare beneficiaries.
 Prescription drugs should be part of Medicare's defined 
        benefit package. It is critical that beneficiaries understand 
        what is included in their benefit and that they have dependable 
        and stable prescription drug coverage.
 The benefit needs to be affordable to assure enough 
        participation and thereby avoid the dangers of risk selection. 
        To this end, the government contribution will need to be 
        significant enough to yield a premium that is affordable and 
        attractive and a benefit design that is responsive to 
        beneficiaries' needs. Medicare Part B is a model in this 
        regard. The Part B benefit is voluntary, but Medicare's 
        contribution toward the cost of the benefit elicits virtually 
        universal participation.
 Beneficiaries should be able to keep the coverage that they 
        currently have, if they choose to do so. A Medicare 
        prescription drug benefit should not be an incentive for 
        employers to drop or cut back on retiree health coverage.
 The benefit must assure that beneficiaries have access to 
        needed drug therapies.
 The benefit must include quality improvement components to 
        reduce medical errors and mismedication and to help reduce 
        overall health care costs.
 The benefit must include meaningful cost-containment for both 
        beneficiaries and the Medicare program. This should include 
        drug purchasing strategies that enable Medicare beneficiaries 
        and the program to take advantage of the aggregate purchasing 
        power of Medicare beneficiaries.
 The benefit must provide additional subsidies for low-income 
        beneficiaries to protect them from unaffordable costs and 
        assure that they have access to the benefit.
 The benefit must be financed in a fiscally responsible manner 
        that is both adequate and stable. AARP believes that an 
        appropriate amount of the Federal budget surplus should be used 
        to help finance a prescription drug benefit.
 A new prescription drug benefit should be part of a strong 
        Medicare program. Prescription drug coverage must be integrated 
        into the program in a manner that preserves and strengthens 
        Medicare.
    We understand your interest in ranking the importance of the 
variables involved in designing a drug benefit. At this time, however, 
AARP is in the process of evaluating what would make sense from a 
policy perspective as well as the type of benefit that would best meet 
the needs of current and future beneficiaries. For example, there are 
strong indications that older Americans want stop-loss coverage, but 
there are also indications that they want some degree of first dollar 
protection. Yet, depending on the amount of the corresponding premium, 
beneficiaries may not be able to afford a comprehensive benefit. More 
importantly, we are not yet prepared to say what type of drug benefit 
design the public will support because we do not know what other 
changes will occur as part of Medicare reform and that their impact 
will be on beneficiaries.
    We believe these principles will help define a Medicare 
prescription drug benefit that our broad-based membership can support. 
The task of designing a drug benefit will not be easy, but we look 
forward to working with you in this effort to carefully explore the 
best options for a Medicare prescription drug benefit. Please do not 
hesitate to contact me or have your staff contact Tricia Smith or Mila 
Becker of our Federal Affairs Department at (202) 434-3770.
            Sincerely,
                                            Horace B. Deets
                                 ______
                                 
                   Leaderhip Council of Aging Organizations
                                                   February 7, 2000
United States House of Representatives
Washington, DC 20515
    Dear Representative: The undersigned members of the Leadership 
Council of Aging Organizations (LCAO) look forward to working with the 
Congress on the creation of a Medicare prescription drug benefit.
    As you consider current proposals and draft new prescription drug 
proposals, we would like you to consider the following issues that are 
of the highest priority to our organizations and the millions of 
Americans that we represent.
Benefits
 Medicare should guarantee access to a voluntary prescription 
        drug benefit as a part of its defined benefit package.
 Medicare's prescription drug benefit should provide 
        comprehensive coverage, including the most current, effective, 
        and individually appropriate drug therapies.
 Medicare's contribution toward the cost of the prescription 
        drug benefit must keep pace with the increase in prescription 
        drug costs and not be tied to budgetary caps.
 Adding a Medicare prescription drug benefit must not reduce 
        access to other Medicare benefits.
Coverage
 The Medicare prescription drug benefit should be available to 
        all Medicare eligible older Americans and persons with 
        disabilities, regardless of income or health status.
 The Medicare prescription drug benefit must be voluntary and 
        must provide safeguards against the erosion of current 
        prescription drug coverage provided by others.
Affordability
 The financing of a new Medicare prescription drug benefit 
        should protect all beneficiaries from burdensome out-of-pocket 
        expenses and unaffordable cost sharing, particularly low-income 
        beneficiaries.
 The new benefit must protect individuals from extraordinary 
        expenses for prescription drugs.
 The government subsidy must be sufficient to guard against 
        risk selection and to provide an attractive benefit design.
 Sufficient subsidies should be provided for low-income 
        beneficiaries to ensure that they have access to the benefit.
Administration
 The new prescription drug benefit should be efficiently 
        managed, include appropriate cost-containment, and reflect the 
        purchasing power of the Medicare beneficiary pool.
Quality
 The new Medicare prescription drug benefit must meet rigorous 
        standards for quality of care, including appropriate monitoring 
        and quality assurance activities.
 The Medicare program should work to prevent the overuse, 
        underuse, and misuse of prescription drugs.
    We request that you carefully consider the issues presented above 
as you develop your Medicare prescription drug proposals. We look 
forward to working with you to ensure that the Medicare program is 
strengthened by your efforts.
            Sincerely,

    AARP; AFSCME Retiree Program; Alzheimer's Association; American 
Association for International Aging; American Association of Homes and 
Services for the Aging; American Federation of Teachers Program on 
Retirement and Retirees; American Society of Consultant Pharmacists; 
Asociacion Nacional Pro Personas Mayores; Association for Gerontology 
and Human Development in Historically Black Colleges and Universities; 
Association of Jewish Aging Services; B'nai B'rith Center for Senior 
Housing and Services; Eldercare America, Inc.; Families, USA; The 
Gerontological Society of America; Gray Panthers; National Academy of 
Elder Law Attorneys; National Asian Pacific Center on Aging; National 
Association of Area Agencies on Aging; National Association of Foster 
Grandparent Program Directors; National Association of Nutrition and 
Aging Services Programs; National Association of Retired and Senior 
Volunteer Program Directors, Inc.; National Association of Senior 
Companion Project Directors; National Association of State Long-Term 
Care Ombudsman Programs; National Association of State Units on Aging; 
National Caucus and Center on Black Aged, Inc.; National Committee to 
Preserve Social Security and Medicare; National Council of Senior 
Citizens; National Council on the Aging, Inc.; National Hispanic 
Council on Aging; National Indian Council on Aging, Inc.; National 
Osteoporosis Foundation; National Senior Citizen Law Center; Older 
Women's League.

    Mr. Greenwood. Without objection, the Chair would enter a 
request for unanimous consent to submit for the record a CRS 
report titled, ``Discharge Use in the House: Recent Use and 
Historical Context,'' which goes to the comments of Mr. Stupak 
that it is unlikely that discharge resolutions result in 
legislation. This is a list from CRS as to how frequently that 
happens. Without objection, so entered.
    [The information referred to follows:]

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    Mr. Waxman. It has happened.
    Mr. Greenwood. It has happened.
    We thank the witnesses for your tenacity and your fortitude 
to stay here for at least 3 hours. We figure that during the 3 
hours we listened to you for 40 minutes and you listened to us 
for 3 hours and 20 minutes, but we thank you for that, and you 
are excused now, please.
    Mr. Bilirakis. I join in my gratitude to Mrs. Lewis and Dr. 
Braun, and would now invite the second panel to come forward 
finally. May we have order, please?
    Ms. Bonnie Washington, director of the Office of 
Legislation, Health Care Financing Administration, accompanied 
by Dr. Jack Hoadley, who is director of the Division of Health 
Financing Policy; and Dr. William J. Scanlon, director of 
Health Financing and Public Health Issues with the General 
Accounting Office. Welcome, Ms. Washington and Drs. Hoadley and 
Scanlon.
    Again, your written statement is a part of the record. We 
are going to set the clock at 5 minutes. You know, we are 
obviously running behind because we had those two votes and 
what not. I certainly will not plan to cut you off if you need 
an extra minute or 2 or 3. So we will start off with Ms. 
Washington. Please proceed.

     STATEMENTS OF BONNIE WASHINGTON, DIRECTOR, OFFICE OF 
LEGISLATION, HEALTH CARE FINANCING ADMINISTRATION, ACCOMPANIED 
BY JACK HOADLEY, DIRECTOR, DIVISION OF HEALTH FINANCING POLICY; 
 AND WILLIAM J. SCANLON, DIRECTOR, HEALTH FINANCING AND PUBLIC 
            HEALTH ISSUES, GENERAL ACCOUNTING OFFICE

    Ms. Washington. Thank you, Chairman Bilirakis, Congressman 
Waxman, and other distinguished subcommittee members. Thank you 
for inviting us here today to discuss the need to provide 
prescription drug coverage in Medicare.
    All beneficiaries need access to an affordable drug 
benefit. Pharmaceuticals are as essential today as hospital 
care was when Medicare was created, but too many people are 
missing out. As many people lack drug coverage today as lacked 
hospital coverage when Medicare was created. Three out of five 
Medicare beneficiaries do not have dependable coverage, and 
only half have coverage the whole year through. One-third of 
Medicare beneficiaries have no drug coverage at all.
    Beneficiaries without coverage are forced to pay full 
retail prices out of their own pockets because they do not get 
the generous discounts that are offered to large purchasers. 
The result is that many beneficiaries go without the medicine 
they need to keep them healthy and out of the hospital.
    Coverage is not just a problem for the poor. More than half 
of the beneficiaries who don't have coverage for drugs have 
incomes above 150 percent of poverty. Those with coverage are 
often finding that it costs more and covers less over time, and 
for some beneficiaries it is disappearing altogether as 
employers drop retiree coverage. Clearly, all beneficiaries 
need access to affordable drug coverage.
    The President has identified four key principles that a 
Medicare drug benefit must meet. First, it must be a voluntary 
benefit available to all beneficiaries, because access can be a 
problem for all kinds of beneficiaries.
    The benefit must have competitive and efficient 
administration, be integrated into the Medicare benefit 
package, but use the private sector to deliver it.
    It must be affordable for both beneficiaries and taxpayers. 
This means providing enough assistance so almost all 
beneficiaries participate. Otherwise, mostly those with high 
drug costs would enroll, and the benefit would become 
unaffordable and eventually become unsustainable.
    Finally, the benefit must ensure access to all medications 
that physicians deem to be medically necessary, and it also 
must encourage high quality care with quality standards such as 
protections against medication errors.
    The President's plan meets those principles. It is 
voluntary, and it is managed by private sector pharmacy benefit 
managers. It is affordable, with a 50 percent premium subsidy 
and extra help for low income beneficiaries. And Mrs. Lewis 
should know that the President's plan guarantees that HMOs like 
hers will be able to continue to provide the drug coverage that 
she depends on. Right now, as you know, many HMOs don't, and 
many that do have been cutting back or raising the premiums for 
that coverage.
    Chairman Bilirakis, we have broad consensus that we must 
act to establish a Medicare drug benefit that everyone can 
count on. We have a growing budget surplus and dramatic 
improvements in Trust Fund solvency. We have a historic 
opportunity to strengthen and modernize the Medicare program 
and keep our commitment to meet the medical needs of the 
elderly and the disabled.
    Thank you again for inviting us to be here, and we look 
forward to continuing to work with this committee on proposals 
to modernize Medicare. Dr. Hoadley and I would be happy to 
answer any questions that you have.
    [The prepared statement of Bonnie Washington follows:]
     Prepared Statement of Bonnie Washington, Director, Office of 
                           Legislation, HCFA
    Chairman Bilirakis, Congressman Brown, distinguished Subcommittee 
members, thank you for inviting us to discuss the need, and our 
proposal, to provide prescription drug coverage for Medicare 
beneficiaries.
    We must act now to ensure that all beneficiaries have an affordable 
prescription drug benefit. Pharmaceuticals are as essential to modern 
medicine today as hospital care was when Medicare was created.
    Lack of prescription drug coverage among senior citizens and people 
with disabilities today is similar to the lack of hospital coverage 
among senior citizens when Medicare was created. Three out of five lack 
dependable coverage. Only half of beneficiaries have year-round 
coverage, and one third have no drug coverage at all. They must pay for 
essential medicines fully out of their own pockets, and are forced to 
pay full retail prices because they do not get the generous discounts 
offered to insurers and other large purchasers. The result is that many 
go without the medicines they need to keep them healthy and out of the 
hospital.
    Drug coverage is not just a problem for the poor. More than half of 
beneficiaries who lack coverage have incomes above 150 percent of the 
federal poverty level (above $17,000 for an elderly couple). Even those 
with most types of coverage find it costs more and covers less. 
Copayments, deductibles and premiums are up. And coverage is often 
disappearing altogether as former employers drop retiree coverage and 
Medigap is not available to everyone. Clearly all beneficiaries need 
access to affordable prescription drug coverage.
                             key principles
    The President has identified four key principles that a Medicare 
drug benefit must meet.

 It must be a voluntary benefit accessible to all 
        beneficiaries. Since access is a problem for beneficiaries of 
        all incomes, ages, and areas, we must not limit a Medicare 
        benefit to a targeted group.
 It must be affordable to beneficiaries and the program. We 
        must provide assistance so almost all beneficiaries 
        participate. Otherwise, primarily those with high drug costs 
        would enroll and the benefit would become unaffordable.
 It must have a competitive and efficient administration. We 
        must integrate the benefit into Medicare but use the private 
        sector to deliver it.
 It must ensure access to needed medications and encourage 
        high-quality care. Beneficiaries must have access to the 
        medications that their physicians deem to be medically 
        necessary, and they must have the assurance of minimum quality 
        standards, including protections against medication errors.
    The President's plan meets these principles.

 Beneficiaries will have access to an optional drug benefit 
        through either traditional Medicare or Medicare managed care 
        plans. Those with retiree coverage can keep it.
 Premiums will be affordable, with extra assistance for those 
        with low-incomes.
 There will be no price controls or new bureaucracy; instead, 
        the new benefit will be offered through private pharmacy 
        benefit managers who can efficiently negotiate fair prices. All 
        qualified pharmacies will be allowed to participate.
 Beneficiaries can get all drugs prescribed by their physicians 
        from private benefit managers who meet minimum quality 
        standards.
    We have broad consensus that we must act now to establish a drug 
benefit for Medicare beneficiaries. We have an historic opportunity 
provided by the growing budget surplus and dramatic improvements in 
Medicare Trust Fund solvency. We have an obligation to keep our 
commitment to meet the medical needs of seniors and the disabled. And 
this can only be done by making a voluntary, affordable, accessible, 
competitive, efficient, quality drug benefit available to all 
beneficiaries, as proposed by the President, in the context of Medicare 
reform.
                               background
    Prescription drugs can prevent, treat, and cure more diseases than 
ever before, both prolonging and improving the quality of life. Proper 
use should minimize hospital and nursing home stays, and may help 
decrease the total cost of care.
    Recognizing that prescription drugs are essential to modern 
medicine, the private sector now includes outpatient drug coverage as a 
standard benefit in almost all policies. Further, all plans in the 
Federal Employees Health Benefits Program are required to offer a 
prescription drug benefit. No one would design Medicare today without 
including coverage for prescription drugs. Prescription drugs are 
particularly important for seniors and disabled Americans, who often 
take several drugs to treat multiple conditions. All across the 
country, Medicare beneficiaries are suffering physical and financial 
harm because they lack coverage.
    Current coverage for prescription drugs for Medicare beneficiaries 
is incomplete and unreliable, as shown by data based on the Medicare 
Current Beneficiary Survey (MCBS). The MCBS is used to gather data on 
prescription drug coverage and spending. Although that survey only 
provides information through 1995, we have used additional information 
that allows us to discuss some disturbing trends since that time.
    We project that this year more than half of Medicare beneficiaries 
will use prescription drugs costing $500 or more, and 38 percent will 
spend more than $1000. Each year, about 85 percent of Medicare 
beneficiaries fill at least one prescription. Yet one third of 
beneficiaries have no coverage for drugs at all. And, in 1996, more 
than half did not have drug coverage for the entire year.
    About half of the beneficiaries without coverage have incomes above 
150 percent of poverty, demonstrating that this is not just a low-
income problem. All these beneficiaries are forced to pay excessively 
high costs for needed prescriptions because they do not get the deep 
discounts offered only to insurers and other large purchasers.
    This situation is worse for the 10 million Medicare beneficiaries 
who live in rural areas. Nearly half of these beneficiaries have 
absolutely no drug coverage. They have less access to employer-based 
retiree health insurance because of the job structure in rural areas. 
And three-quarters of rural beneficiaries do not have access to 
Medicare+Choice plans and the drug coverage that many of these plans 
provide.
    In 1995, about 30 percent of Medicare beneficiaries had private 
sector coverage offered by former employers to retirees. And this 
coverage is eroding. The number of firms with 500 or more employees 
offering retiree health coverage dropped 40 percent in 1994 to 30 
percent in 1998, according to the employee benefits research firm 
Mercer/Foster Higgins (numbers for small firms would be even lower).
    The true impact of this trend has not yet been realized, because 
some employers' decisions to drop coverage apply only to future 
retirees. Furthermore, a recent survey prepared for the Kaiser Family 
Foundation reported that 40 percent of large employers would consider 
cutting back on prescription drug coverage in the next three to five 
years. As today's workers retire, the population of Medicare 
beneficiaries with access to retiree coverage is likely to be well 
below the levels reported in our surveys.
    About one in six Medicare beneficiaries today are enrolled in 
Medicare+Choice plans, most of which include some drug coverage. 
Although Medicare+Choice plans are only required to provide the 
traditional Medicare benefit package, the majority of them also provide 
prescription drugs, which is one reason why they have been popular with 
Medicare beneficiaries.
    Nearly one-third of all beneficiaries, however, lack a 
Medicare+Choice option because they live in areas where there are no 
plans. And where plans are available, they have been raising premiums 
and copayments for drugs, while lowering caps on drug coverage. In 
2000, three quarters of plans cap benefit payments at or below $1000, 
and nearly one-third of plans cap coverage at $500 or less, even though 
the majority of Medicare beneficiaries use prescription drugs costing 
$500 or more each year.
    About one in eight Medicare beneficiaries have drug coverage 
through Medicaid. Eligibility for Medicaid, however, is restricted to 
beneficiaries under 100% of poverty, and the majority of beneficiaries 
eligible for such coverage--60 percent--are not enrolled in the 
program. This enrollment problem persists despite increasing outreach 
efforts to enroll those who are eligible.
    Roughly one in ten Medicare beneficiaries obtain drug coverage from 
a supplemental Medigap plan. Medigap coverage, however, is expensive 
and its availability is not guaranteed except right after a beneficiary 
turns 65.
    Costs for these policies are rising rapidly, by 35 percent between 
1994 and 1998, according to Consumer Reports, in part because those 
being covered this way are less healthy than the average beneficiary. 
The General Accounting Office (GAO) found that almost half of all 
Medigap insurers implemented substantial increases in 1996 and 1997, 
with AARP--one of the largest Medigap providers, and the only one 
offering a community-rated policy covering prescription drugs--
increasing rates by 8.5 percent in 1997, 10.9 percent in 1998, and 9.4 
percent in 1999.
    The GAO also found that Medigap premiums for plans that include 
drug coverage vary widely, both within and across States. For example, 
premiums charged to a 65-year-old beneficiary for the standardized 
``I'' Medigap plan ranged from $991 to $5,943 in 1999. And the average 
premium for the standardized ``H'' Medigap plan ranges from $1,174 in 
Virginia to $2,577 in Georgia.
    Furthermore, premiums for Medigap coverage can increase with age in 
most States. In some parts of the country, beneficiaries over age 75 
are paying more than $100 per month for a plan with drug coverage over 
and above the premium for a comparable plan without drug coverage. This 
occurs despite the fact that the maximum annual payment for drug costs 
in the ``H'' and ``I'' plans is only $1250 per year, barely over $100 a 
month.
                          the president's plan
    The President has proposed a comprehensive Medicare reform plan 
that includes a voluntary, affordable, accessible, competitive, 
efficient, quality drug benefit that will be available to all 
beneficiaries. The President's plan also dedicates over half of the on-
budget surplus to Medicare and extends the life of the Medicare Trust 
Fund to at least 2025. It also improves preventive benefits, enhances 
competition and use of private sector purchasing tools, helps the 
uninsured near retirement age buy into Medicare, and strengthens 
program management and accountability.
    The President's drug benefit proposal makes coverage available to 
all beneficiaries, regardless of their incomes. The hallmark of the 
Medicare program since its inception has been its social insurance 
role--everyone, regardless of income, is entitled to the same basic 
package of benefits. This is a significant factor in the unwavering 
support for the program from the American public and must be preserved. 
All workers pay taxes to support the Medicare program and therefore all 
beneficiaries should have access to a new drug benefit.
    A universal benefit also helps ensure that enrollment is not 
dominated by those with high drug costs (adverse selection), which 
would make the benefit unaffordable and unsustainable. And, as I 
described earlier, lack of drug coverage is not a low-income problem--
beneficiaries of all incomes face barriers.
    The benefit is completely voluntary. If beneficiaries have what 
they think is better coverage, they can keep it. And the President's 
plan includes assistance for employers offering retiree coverage that 
is at least as good as the Medicare benefit to encourage them to offer 
and maintain that coverage. This will help to minimize disruptions in 
parts of the market that are working effectively, and it is a good deal 
for beneficiaries, employers, and the Medicare program.
    We expect that most beneficiaries will choose this new drug option 
because of its attractiveness, affordability, and stability.
    For beneficiaries who choose to participate, Medicare will pay half 
of the monthly premium, with beneficiaries paying an estimated $26 per 
month in 2003. The independent HCFA Actuary has concluded that at least 
50 percent of the premium must be subsidized in order to ensure 
adequate participation. A lesser subsidy would result in adverse 
selection and thus an unaffordable and unsustainable benefit.
    Under the President's plan, Medicare will pay half the cost of each 
prescription, with no deductible. The benefit will cover up to $2,000 
of prescription drugs when coverage begins in 2003, and increase to 
$5,000 by 2009, with a 50 percent beneficiary coinsurance. After that, 
the dollar amount of the benefit cap will increase each year to keep up 
with inflation.
    For beneficiaries with higher drug costs, they will continue to 
receive the discounted prices negotiated by the private benefit 
managers after they exceed the coverage cap. And, to help beneficiaries 
with the highest drug costs, we are setting aside a reserve of $35 
billion over the next 10 years, with funding beginning in 2006. It will 
be available so that Congress and the Administration can work in 
collaboration to design protections for those with the greatest need.
    Benefit managers, such as pharmacy benefit manager firms and other 
eligible companies, will administer the prescription drug benefit for 
beneficiaries in the traditional Medicare program. These entities will 
bid competitively for regional contracts to provide the service, and we 
will review and periodically re-compete those contracts to ensure that 
there is healthy competition. The drug benefit managers--not the 
government--will negotiate discounted rates with drug manufacturers, as 
they do now in the private sector. We want to give beneficiaries a fair 
price that the market can provide without a statutory fee schedule or 
price controls.
    The drug benefit managers will have to meet access and quality 
standards, such as implementing aggressive drug utilization review 
programs. And their contracts with the government will include 
incentives to keep costs and utilization low.
    In general, all therapeutic classes of drugs will be covered. Each 
drug benefit manager will be allowed to establish a formulary, or list 
of covered drugs. They will have to cover off-formulary drugs when a 
physician requests a specific drug that is not on the formulary. 
Coverage for the handful of drugs that are now covered by Medicare will 
continue under current rules and will not be included in the new drug 
benefit package.
    And Medicare+Choice plans will benefit from the President's Plan. 
Beneficiaries enrolled in Medicare+Choice plans will receive this 
optional coverage through those plans, and the plans will use their 
existing management tools to negotiate prices and formularies. In some 
markets today, M+C plans offer prescription drug coverage using the 
excess from payments intended to cover basic Medicare benefits. Under 
the President's proposal, M+C plans in all markets will be paid 
explicitly for providing a drug benefit, so they no longer have to 
depend on what the rate is in a given area to determine whether they 
can offer a benefit. We estimate that plans will receive $54 billion 
over 10 years to pay for the costs of drug coverage.
    We will no longer see the extreme regional variation in 
Medicare+Choice drug coverage. Today, only 23 percent of rural 
beneficiaries with access to Medicare+Choice have access to 
prescription drugs, compared to 86 percent of urban beneficiaries. 
Under the President's plan, both rural and urban beneficiaries will 
have drug coverage available from all Medicare+Choice plans in their 
area. And beneficiaries will not lose their drug coverage if a plan 
withdraws from their area or if they choose to leave a plan.
    The President's budget proposes to pay for the drug benefit through 
a combination of premiums and dedication from the on-budget surplus. 
Premiums will be collected like Medicare Part B premiums, as a 
deduction from Social Security checks for most beneficiaries who choose 
to participate. Beneficiaries pay roughly half of program costs.
    Low-income beneficiaries would receive special assistance. States 
may elect to place those who now receive drug coverage through Medicaid 
in the Medicare drug program instead, with Medicaid paying premiums and 
cost sharing as for other Medicare benefits. We would expand Medicaid 
eligibility so that all beneficiaries with incomes up to 135 percent of 
poverty would receive full assistance for their drug premiums and cost 
sharing. Beneficiaries with incomes between 135 and 150 percent of 
poverty would pay a partial, sliding-scale premium based on their 
income. The Federal government will fully fund States' Medicaid costs 
for the beneficiaries between 100 and 150 percent of poverty.
                        meeting basic principles
    In any proposal to provide a prescription drug benefit for Medicare 
beneficiaries, it is essential that the key principles identified by 
the President be met.

 It must be a voluntary benefit accessible to all 
        beneficiaries.
 It must be affordable to beneficiaries and the program.
 It must be competitive and efficient.
 It must ensure access to needed medications and encourage 
        high-quality care.
    Unfortunately, some of the proposals to establish a Medicare drug 
benefit fail to meet one or more of these criteria.
    Proposals that cover prescriptions for only some diseases fail to 
provide access for all beneficiaries who need coverage. The number of 
conditions for which effective drug treatments are available is growing 
at an unprecedented pace. All beneficiaries need to know that they will 
have affordable access to the drugs they need when they need them.
    Proposals that provide assistance only to low-income beneficiaries 
also fail to guarantee access for all beneficiaries. Most lacking drug 
coverage have incomes above 150 percent of poverty, and it is 
increasingly difficult for them to afford the medicines they need as 
drug prices rise faster than inflation. It also is essential that we 
maintain the principle that all Medicare benefits are equally available 
to all beneficiaries. This is a pillar of the program's strength and 
overwhelming support among the American people.
    Proposals with a premium subsidy of only 25 percent would make the 
benefit unaffordable to many low and middle-income beneficiaries unable 
to shoulder the remaining 75 percent. As a result, the benefit would 
attract a disproportionate number of enrollees with high drug costs. 
That would drive up the price of premiums, which would further 
discourage those with lower incomes or lower drug costs from enrolling, 
and in the end result in an unsustainable program. As mentioned above, 
the independent HCFA actuary has concluded that a subsidy of at least 
50 percent is essential to attract a range of enrollees wide enough to 
maintain an adequate risk pool.
    Proposals with continuous or annual open enrollment periods would 
be especially vulnerable to attracting enrollees with high drug costs 
because beneficiaries could wait until they had substantial drug costs 
before enrolling. This would exacerbate adverse selection problems 
caused by an inadequate premium subsidy.
    Proposals that link a drug benefit to a high-option Medicare plan 
with additional benefits like a stop-loss for out-of-pocket costs also 
make the drug benefit less affordable. Beneficiaries who elect the high 
option would have to pay not only for drug coverage but also for all 
the other higher costs of the high option plan that many would not 
need, want, or be able to afford.
    Proposals that fail to establish private sector benefit managers 
everywhere, and instead merely allow private plans to offer coverage 
when and where they wish, fail to ensure access for all beneficiaries. 
The benefit would be available only in regions where Medigap and other 
private plans step forward to offer it. Medigap insurers have already 
said they would not find stand-alone drug policies an attractive 
business proposition and are currently offering drugs less frequently. 
Medigap plans also have little experience negotiating with drug 
manufacturers and do not pool the purchasing power of seniors. That 
could well make the coverage unaffordable for many beneficiaries.
    And, finally, proposals that do not include a minimum or specified 
benefit design cannot ensure access or high-quality care. They would 
allow insurers offering the coverage to ``cherry-pick'' by tailoring 
benefits in a way that would limit the value of the benefit to those 
with greater prescription drug needs. And they would not ensure that 
minimal safety protections, such as medication error prevention 
programs, are in place.
                               conclusion
    The need for a prescription drug benefit in Medicare is clear. The 
consensus across the political spectrum that it should be added is 
broad. The principles on which it must be based are strong. The 
opportunity is before us. The time to act is now.
    I look forward to working with all of you on this critical issue. I 
thank you for holding this hearing, and I am happy to answer your 
questions.

    Mr. Bilirakis. Thank you, Ms. Washington. Dr. Hoadley, 
would you like to add anything.
    Mr. Hoadley. Not at this point.
    Mr. Bilirakis. Dr. Scanlon, please proceed, sir.

                STATEMENT OF WILLIAM J. SCANLON

    Mr. Scanlon. Thank you very much, Mr. Chairman and members 
of the committee. I am very pleased to be here as you discuss 
options to increase Medicare beneficiaries' access to 
prescription drugs.
    There has been growing concern about the gap in the 
Medicare program created by the lack of outpatient prescription 
drug coverage, a gap which may leave some of Medicare's most 
vulnerable beneficiaries unable to afford needed drugs or 
heavily burdened by their cost. While you have heard today much 
of the statistics that are in our testimony about the lack of 
coverage for some Medicare beneficiaries and the fragility of 
coverage from others, I would like to add one fact that I think 
illustrates some of the tradeoffs that you have heard about in 
terms of being able to afford drugs or to afford the other 
necessities of life, a tradeoff that has consequences for one's 
health potentially.
    And that is that having coverage has a significant impact 
on your access to drugs. Medicare beneficiaries without drug 
coverage but who are sick tend to buy fewer drugs than their 
counterparts with drug coverage. Research shows that 
beneficiaries in poor or fair health, without coverage, spend 
30 to 50 percent less on drugs than similar beneficiaries with 
coverage. And that difference in spending is considerable 
because, as we have also heard, beneficiaries with coverage are 
much more likely to be getting discounts on the drugs that they 
purchase.
    Potential remedies to afford greater access to prescription 
drugs that have been discussed have fallen into two categories. 
The first involves proposals to subsidize an insurance benefit, 
either through a publicly operated program or in the form of a 
drug-only private insurance policy. The second would provide 
access to the elderly to discounted prices available to other 
purchasers.
    Adding a drug benefit to Medicare, an example obviously of 
the public sector approach, has probably received the most 
attention. Therefore, in the rest of my oral remarks I would 
like to comment on that option, though I would note at the same 
time that the issue of designing and managing a public drug 
benefit applies equally if the program is federally managed 
through Medicare or managed by State government.
    A fundamental consideration in developing a Medicare 
prescription drug benefit would be to make the best use of 
resources that are available. If you believe that resources are 
limited, a first step in that regard would be to target those 
resources to provide the greatest benefit, potentially focusing 
assistance on lower income beneficiaries who are not eligible 
for Medicaid or those with larger catastrophic drug expenses.
    A second major concern will be how to ensure that the 
program dollars are spent efficiently and effectively. 
Accomplishing this will be challenging. Looking at the 
experience of other third party payers who have pursued 
different strategies to control their spending, and thinking 
about how to apply them in a public program, illustrates some 
of the challenge.
    The world in which the insured individuals purchase drugs 
at retail pharmacies, at retail prices, and then seek 
reimbursement, is giving way to a world in which third party 
payers influence which drug is purchased, how much is paid for 
it, and where it is purchased. Medicaid programs provide an 
example of one approach to cost control which focuses on 
seeking discounted prices.
    The Medicaid drug rebate program requires drug 
manufacturers to give State Medicaid programs rebates for 
outpatient drugs based on the lowest or best prices that they 
charge other purchasers. While effective in securing the 
Medicaid programs billions in rebates, the impact of these 
discounts on the pharmaceutical market needs to be noted. 
Manufacturers' adjustments of prices and discounts following 
the introduction of Medicaid rebates meant that other payers 
faced higher prices.
    The Medicaid rebate approach has not included techniques 
included by other payers to limit spending by exercising 
controls on utilization. These other payers, including private 
insurers and Medicare+Choice plans, have sought to manage their 
drug benefits by attempting to control and channel drug 
utilization through the use of formularies and cost sharing. 
These mechanisms not only contribute to controlling use, but 
they also allow payers to concentrate purchases on selected 
drugs and thereby use purchasing power to obtain even greater 
discounts from manufacturers.
    Adopting some of these techniques with Medicare might 
provide the potential for better control of costs. However, how 
to adapt them to deal with the unique characteristics and 
enormity of the Medicare program raises many questions.
    I would like to end my comments by broadening the 
discussion a bit. Adding a drug benefit to Medicare is 
correctly seen as a modernization of the Medicare benefit 
package and program. But however we feel, you also need to 
recognize there are other and bigger challenges to modernizing 
Medicare. That is to make sure it is sufficient and sustainable 
to serve the needs of the baby boom and future generations of 
beneficiaries, and that we can satisfy other social needs and 
preferences.
    We are in a period of prosperity. The deficit has 
evaporated. Surpluses are projected for the next 10 years. The 
growth of Medicare spending has temporarily abated. But, 
nevertheless, we face substantial challenges brought about by 
demographics.
    The baby boom generation will add approximately 30 million 
to Medicare rolls by 2030. While those numbers alone might 
imply huge increases in spending, the likely improvements in 
medical service that all will want access to will also create 
additional pressure.
    We have been aware of the financial pressures facing 
Medicare. However, they have been discussed most often in terms 
of the solvency of the Hospital Insurance, HI, Trust Fund. We 
need to broaden our focus. HI Trust Fund solvency is an issue. 
As the graphic over there indicates, the fund will be depleted 
about the year 2014. Indeed, for the majority of the 1990's 
there were outflows from that fund every year.
    The HI Trust Fund, however, is only a part of the picture. 
It funds Part A. Part B coverage of physicians and other 
services is almost 40 percent of the program, and it is funded 
75 percent out of general revenues. Thus, we need to focus on 
the full share of our resources that will be needed by 
Medicare.
    As this next graphic shows, Medicare, Medicaid and Social 
Security will absorb increasing shares of Gross Domestic 
Product and Federal revenues this century. Indeed, if Federal 
revenues were to remain at a constant share of GDP, by 2030 
these entitlements will be crowding out some discretionary 
spending like defense or education. By 2050, all discretionary 
spending would be crowded out, as would some interest on the 
debt.
    This picture means that prudence demands that we focus 
broadly on Medicare and not just on the absence of prescription 
drug coverage. We should be making every effort to ensure 
needed services are purchased efficiently, that the burden of 
financing is distributed equitably, and that the program 
remains sustainable and affordable for future generations.
    Thank you very much, Mr. Chairman.
    [The prepared statement of William J. Scanlon follows:]
   Prepared Statement of David M. Walker, Comptroller General of the 
                             United States
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today as you discuss options for increasing Medicare 
beneficiaries' access to prescription drugs. There are growing concerns 
about gaps in the Medicare program, most notably the lack of outpatient 
prescription drug coverage, which may leave Medicare's most vulnerable 
beneficiaries with high out-of-pocket costs that they may not be able 
to afford. In 1996, almost a third of Medicare beneficiaries lacked 
prescription drug coverage. The remaining two-thirds had at least some 
drug coverage through other sources--most commonly employer-sponsored 
health plans. Although the proportion of beneficiaries who had drug 
coverage rose between 1995 and 1996, recent evidence indicates that 
this trend of expanding drug coverage is unlikely to continue. 
Moreover, the burden of prescription drug costs falls most heavily on 
the Medicare beneficiaries who lack drug coverage or those who have 
substantial health care needs. In 1999, an estimated 20 percent of 
Medicare beneficiaries had drug costs of $1,500 or more--a substantial 
sum for those lacking some form of insurance to subsidize the purchase.
    At the same time, however, long-term cost pressures facing the 
Medicare program are considerable. There appears to be an emerging 
consensus that substantive financing and programmatic reforms are 
necessary to put Medicare on a sustainable footing for the future. 
These fundamental program reforms are vital to reducing the program's 
growth, which threatens to absorb ever-increasing shares of the 
nation's budgetary and economic resources. Thus, proposals to help 
seniors with the costs of prescription drugs should be carefully 
crafted to avoid further erosion of the projected financial condition 
of the Medicare program, which, according to its trustees, is already 
unsustainable in its present form.
    On the one hand, you must grapple with the hard choices involved in 
making the Medicare program sustainable for future generations. On the 
other, you are faced with the plight of many seniors who cannot afford 
the medical miracles that may be achieved through access to 
pharmaceutical advances. Expanding Medicare's benefit package could 
address the latter. However, a recent study suggests that such an 
expansion could add between 7.2 and 10 percent annually to Medicare's 
costs.1 Increased spending of that magnitude would only 
exacerbate the tough choices that will be required to put Medicare on 
sustainable footing for the future.
---------------------------------------------------------------------------
    \1\ M.E. Gluck, National Academy of Social Insurance Medicare 
Brief: A Medicare Prescription Drug Benefit (April 1999), p. 8. http//
www.nasi.org/Medicare.medbr1.htm (4/22/99).
---------------------------------------------------------------------------
    You are considering these issues at a historic crossroad. After 
nearly 30 years of deficits, the combination of hard choices and 
remarkable economic growth has led to a budget surplus. We appear--at 
least for the near future--to have slain the deficit dragon. In its 
most recent projections, the Congressional Budget Office (CBO) shows 
both unified and on-budget surpluses throughout the next 10 years. 
While this is good news and even superior to the projections made last 
year, it does not mean that hard choices are a thing of the past. 
First, it is important to recognize that by their very nature 
projections are uncertain. This is especially true today because, as 
CBO notes, it is too soon to tell whether recent boosts in revenue 
reflect a major structural change in the economy or a more temporary 
divergence from historical trends. Indeed, CBO points out that assuming 
a return to historical trends and slightly faster growth in Medicare 
would change the on-budget surplus to a growing deficit. This means we 
should treat surplus predictions with caution. Current projected 
surpluses could well prove to be fleeting, and thus appropriate caution 
should be exercised when creating new entitlements that establish 
permanent claims on future resources.
    Moreover, while the size of future surpluses could exceed or fall 
short of projections, we know that demographic and cost trends will, in 
the absence of meaningful reform, drive Medicare spending to levels 
that will prove unsustainable for future generations of taxpayers. 
Accordingly, we need to view this period of projected prosperity as an 
opportunity to address the structural imbalances in Medicare, Social 
Security, and other entitlement programs before the approaching 
demographic tidal wave makes the imbalances more dramatic and possible 
solutions more painful.
    As the foregoing suggests, the stakes associated with Medicare 
reform are high for the program itself and for the rest of the federal 
budget, both now and for future generations. Current policy decisions 
can help us prepare for the challenges of an aging society in several 
important ways: (1) reducing public debt to increase national savings 
and investment, (2) reforming entitlement programs to reduce future 
claims and free up resources for other competing priorities, and (3) 
establishing a more sustainable Medicare program that delivers 
effective and affordable health care to our seniors.
    My remarks today will focus on Medicare beneficiaries' access to 
prescription drugs and the environment in which you consider increasing 
that access. Two proposals before you, one offered in the President's 
budget and the other contained in the Breaux-Frist bill,2 
would incorporate Medicare prescription drug coverage in the context of 
larger Medicare reform. Other proposals that focus only on increasing 
access to affordable prescription drugs are also being considered. 
These proposals would either subsidize prescription drug coverage or 
lower prices faced by beneficiaries without coverage. To put these 
proposals in context, I will discuss the factors contributing to the 
growth in prescription drug spending and efforts to control that 
growth. I will also discuss design and implementation issues to be 
considered regarding proposals to improve seniors' access to affordable 
prescription drugs. I then will repeat my message about the Medicare 
program's current financial condition and its long term sustainability.
---------------------------------------------------------------------------
    \2\ S. 1895, Medicare Preservation and Improvement Act of 1999.
---------------------------------------------------------------------------
    But before I turn to the specifics, let me reiterate that although 
people want unfettered access to health care, and some have needs that 
are not being met, health care costs compete with other legitimate 
priorities in the federal budget, and their projected growth threatens 
to crowd out future generations' flexibility to decide which of these 
competing priorities will be met. Thus, in making important fiscal 
decisions for our nation, policymakers need to consider the fundamental 
differences between wants, needs, and what both individuals and our 
nation can afford. This concept applies to all major aspects of 
government, from major weapons system acquisitions to issues affecting 
domestic programs. It also points to the fiduciary and stewardship 
responsibility that we all share to ensure the sustainability of 
Medicare for current and future generations within a broader context of 
also providing for other important national needs and economic growth. 
We have an opportunity to use our unprecedented economic wealth and 
fiscal good fortune to address today's needs but an obligation to do so 
in a way that improves the prospects for future generations. This 
generation has a responsibility to future generations to reduce the 
debt burden they will inherit, to provide a strong foundation for 
future economic growth, and to ensure that future commitments are both 
adequate and affordable. Prudence requires making the tough choices 
today while the economy is healthy and the workforce is relatively 
large.
   rising drug spending elevates beneficiary access concerns and the 
                   importance of cost-control efforts
    Extensive research and development over the past 10 years have led 
to new prescription drug therapies and improvements over existing 
therapies that, in some instances, have replaced other health care 
interventions. For example, new medications for the treatment of ulcers 
have virtually eliminated the need for some surgical treatments. As a 
result of these innovations, the importance of prescription drugs as 
part of health care has grown. However, the new drug therapies have 
also contributed to a significant increase in drug spending as a 
component of health care costs. The Medicare benefit package, largely 
designed in 1965, provides virtually no coverage. In 1996, almost one 
third of beneficiaries had employer-sponsored health coverage, as 
retirees, that included drug benefits. More than 10 percent of 
beneficiaries received coverage through Medicaid or other public 
programs. To protect against drug costs, the remainder of Medicare 
beneficiaries can choose to enroll in a Medicare+Choice plan with drug 
coverage if one is available in their area or purchase a Medigap 
policy.3 The availability, breadth, and price of such 
coverage is changing as the costs of expanded prescription drug use 
drives employers, insurers, and managed care plans to adopt new 
approaches to control the expenditures for this benefit. These 
approaches, in turn, are reshaping the drug market.
---------------------------------------------------------------------------
    \3\ As an alternative to traditional Medicare fee-for-service, 
beneficiaries in Medicare+Choice plans (formerly Medicare risk health 
maintenance organizations) obtain all their services through a managed 
care organization and Medicare makes a monthly capitation payment to 
the plan on their behalf.
---------------------------------------------------------------------------
Rise in Prescription Drug Spending
    Over the past 5 years, prescription drug expenditures have grown 
substantially, both in total and as a share of all health care outlays. 
Prescription drug spending grew an average of 12.4 percent per year 
from 1993 to 1998, compared with a 5 percent average annual growth rate 
for health care expenditures overall. (See table 1.) As a result, 
prescription drugs account for a larger share of total health care 
spending--rising from 5.6 percent to 7.9 percent in 1998.

                         Table 1: National Expenditures for Prescription Drugs, 1993-98
----------------------------------------------------------------------------------------------------------------
                                                                                   Annual growth
                                                                   Prescription         in         Annual growth
                                                                       drug        prescription    in all health
                              Year                                 expenditures        drug            care
                                                                   (in billions)   expenditures    expenditures
                                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
1998............................................................           $90.6            15.4             5.6
1997............................................................           $78.5            14.0             4.7
1996............................................................           $68.9            12.9             4.6
1995............................................................           $61.0            10.6             4.8
1994............................................................           $55.2             9.0             5.5
1993............................................................           $50.6             8.7             7.4
Average annual growth between 1993 and 1998.....................................            12.4             5.0
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration (HCFA), Office of the Actuary.

    Total drug expenditures have been driven up by both greater 
utilization of drugs and the substitution of higher-priced new drugs 
for lower-priced existing drugs. Private insurance coverage for 
prescription drugs has likely contributed to the rise in spending, 
because insured consumers are shielded from the direct costs of 
prescription drugs. In the decade between 1988 and 1998, the share of 
prescription drug expenditures paid by private health insurers rose 
from almost a third to more than half. (See fig. 1.) The development of 
new, more expensive drug therapies--including new drugs that replace 
old drugs and new drugs that treat disease more effectively--also 
contributed to the drug spending growth by boosting the volume of drugs 
used as well as the average price for drugs used. The average number of 
new drugs entering the market each year rose from 24 at the beginning 
of the 1990s to 33 now. Similarly, biotechnology advances and a growing 
knowledge of the human immune system are significantly shaping the 
discovery, design, and production of drugs. Advertising pitched to 
consumers has also likely upped the use of prescription drugs. A recent 
study found that the 10 drugs most heavily advertised directly to 
consumers in 1998 accounted for about 22 percent of the total increase 
in drug spending between 1993 and 1998.4 Between March 1998 
and March 1999, industry spending on advertising grew 16 percent to 
$1.5 billion. All of these factors suggest the need for effective cost 
control mechanisms to be in place under any option to increase access 
to prescription drugs.
---------------------------------------------------------------------------
    \4\ Barents Group LLC for the National Institute for Health Care 
Management Research and Educational Foundation, Factors Affecting the 
Growth of Prescription Drug Expenditures (July 9, 1999);, p. iii.

Figure 1: Comparison of National Outpatient Drug Expenditures, 1988 and 
                                  1998
[GRAPHIC] [TIFF OMITTED]62971.034

    Note: Out-of-pocket expenditures include direct spending by 
consumers for prescription drugs, such as coinsurance, deductibles, and 
any amounts not covered by insurance. Out-of-pocket premiums paid by 
individuals are not counted here.
    Source: HCFA, Office of the Actuary.
Current Medicare Beneficiary Drug Coverage
    Prescription drugs are an important component of medical care for 
the elderly because of the prevalence of chronic and other health 
conditions associated with aging. In 1995, Medicare beneficiaries had 
an average of more than 18 prescriptions filled.5 This 
varies substantially across beneficiaries, however, reflecting the 
range of their needs and also financial considerations such as third-
party prescription drug coverage. In 1995, an elderly person's total 
average annual drug costs were $600 6 compared with a little 
more than $140 for a non-elderly persons.7 For some, 
prescription drug spending was considerably higher--6 percent of 
Medicare beneficiaries spent $2,000 or more.8 A recent 
report had projected that by 1999 an estimated 20 percent of Medicare 
beneficiaries would have total drug costs of $1,500 or more--a 
substantial sum for people lacking some form of insurance to subsidize 
their purchases or for those facing coverage limits. 9
---------------------------------------------------------------------------
    \5\ M. Davis and others, ``Prescription Drug Coverage, Utilization, 
and Spending Among Medicare Beneficiaries,'' Health Affairs, Vol. 18, 
No. 1 (Jan./Feb. 1999);, p. 237.
    \6\ M. Davis, p. 239.
    \7\ Agency for Health Care Policy and Research Center for Cost and 
Financing Studies, National Medical Expenditure Survey data, Trends in 
Personal Health Care Expenditures, Health Insurance, and Payment 
Sources, Community-Based Population, 1987-1995 (Mar. 1997), p. 10. 
http://www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf (6/10/99).
    \8\ J.A. Poisal and others, ``Prescription Drug Coverage and 
Spending for Medicare Beneficiaries,'' Health Care Financing Review, 
Vol. 20, No. 3 (Spring 1999), p. 20.
    \9\ M.E. Gluck, p. 2.
---------------------------------------------------------------------------
    In 1996, almost a third of Medicare beneficiaries lacked drug 
coverage altogether. (See fig. 2.) The remaining two-thirds had at 
least some drug coverage--most commonly through employer-sponsored 
health plans. The proportion of beneficiaries who had drug coverage 
rose between 1995 and 1996, owing to increases in those with Medicare 
HMOs, individually purchased supplemental coverage, and employer-
sponsored coverage. However, recent evidence indicates that this trend 
of expanding drug coverage is unlikely to continue.

  Figure 2: Sources of Drug Coverage for Medicare Beneficiaries, 1996
[GRAPHIC] [TIFF OMITTED]62971.035

    ``All Other'' includes coverage under non-risk Medicare HMOs, 
state-based plans, the Department of Defense, and the Department of 
Veterans Affairs.
    Source: HCFA, based on the 1996 Medicare Current Beneficiary 
Survey.

    Although employer-sponsored health plans provide drug coverage to 
the largest segment of the Medicare population with coverage, there are 
signs that this could be eroding. Fewer employers are offering health 
benefits to retirees eligible for Medicare and those that continue to 
offer coverage are asking retirees to pay a larger share of costs. The 
proportion of employers offering health coverage to retirees eligible 
for Medicare declined from 40 percent in 1993 to 28 percent in 1999. 
This decline is at least in part due to the rise in the cost of 
providing this coverage, which grew about 21 percent from 1993 to 1999. 
At the same time, the proportion of employers asking retirees to pay 
the full cost of their health coverage increased from 36 percent to 40 
percent.
    In 1999, 13 percent of Medicare beneficiaries obtained prescription 
drug coverage through a Medicare+Choice plan, up from 8 percent in 
1996. Medicare+Choice plans have found drug coverage to be an 
attractive benefit that beneficiaries seek out when choosing to enroll 
in managed care organizations. However, owing to rising drug 
expenditures and their effect on plan costs, the drug benefits the 
plans offer are becoming less generous. Many plans restructured drug 
benefits in 2000, increasing enrollees' out-of-pocket costs and 
limiting their total drug coverage.
    Beneficiaries may purchase Medigap policies that provide drug 
coverage, although this tends to be expensive, involves significant 
cost-sharing, and includes annual limits. Standard Medigap drug 
policies include a $250 deductible, a 50 percent coinsurance 
requirement, and a $1,250 or $3,000 annual limit. Furthermore, Medigap 
premiums have been increasing in recent years. In 1999, the annual 
premium for one type of Medigap policy with a $1,250 annual limit on 
drug coverage, ranged from approximately $1,000 to $6,000.
    All beneficiaries who have full Medicaid benefits 10 
receive drug coverage that is subject to few limits and low cost-
sharing requirements. For beneficiaries whose incomes are slightly 
higher than Medicaid standards, 14 states currently offer pharmacy 
assistance programs that provided drug coverage to approximately 
750,000 beneficiaries in 1997. The three largest state programs 
accounted for 77 percent of all state pharmacy assistance program 
beneficiaries. 11 Most state pharmacy assistance programs, 
like Medicaid, have few coverage limitations.
---------------------------------------------------------------------------
    \10\ Certain low-income Medicare beneficiaries are dually eligible 
for Medicare and Medicaid.
    \11\ These programs are operated in New Jersey, New York, and 
Pennsylvania.
---------------------------------------------------------------------------
    The burden of prescription drug costs falls most heavily on the 
Medicare beneficiaries who lack drug coverage or who have substantial 
health care needs. Drug

coverage is less prevalent among beneficiaries with lower incomes. In 
1995, 38 percent of beneficiaries with income below $20,000 were 
without drug coverage, compared to 30 percent of beneficiaries with 
higher incomes. Additionally, the 1995 data show that drug coverage is 
slightly higher among those with poorer self-reported health status. At 
the same time, however, beneficiaries without drug coverage and in poor 
health had drug expenditures that were $400 lower than the expenditures 
of beneficiaries with drug coverage and in poor health. This might 
indicate access problems for this segment of the population.
    Even for beneficiaries who have drug coverage, the extent of the 
protection it affords varies. The value of a beneficiary's drug benefit 
is affected by the benefit design, including cost-sharing requirements 
and benefit limitations. Evidence suggests that premiums are on the 
rise for employer-sponsored benefits, Medigap policies, and most 
recently, Medicare+Choice plans. Although reasonable cost sharing 
serves to make the consumer a more prudent purchaser, copayments, 
deductibles, and annual coverage limits can reduce the value of drug 
coverage to the beneficiary. Harder to measure is the effect on 
beneficiaries of drug benefit restrictions brought about through 
formularies designed to limit or influence the choice of drugs.
Cost-Control Approaches Are Reshaping the Pharmaceutical Market
    During this period of rising prescription drug expenditures, third-
party payers have pursued various approaches to control spending. These 
efforts have initiated a transformation of the pharmaceutical market. 
Whereas insured individuals formerly purchased drugs at retail prices 
at pharmacies and then sought reimbursement, now third-party payers 
influence which drug is purchased, how much is paid for it, and where 
it is purchased.
    A common technique to manage pharmacy care and control costs is to 
use a formulary. A formulary is a list of prescription drugs, grouped 
by therapeutic class, that a health plan or insurer prefers and may 
encourage doctors to prescribe. Decisions about which drugs to include 
in a formulary are based on the drugs' medical value and price. The 
inclusion of a drug in a formulary and its cost can affect how 
frequently it is prescribed and purchased and, therefore, can affect 
its market share.
    Formularies can be open, incentive-based, or closed. Open 
formularies are often referred to as ``voluntary'' because enrollees 
are not penalized if their physicians prescribe nonformulary drugs. 
Incentive-based formularies generally offer enrollees lower copayments 
for the preferred formulary or generic drugs. Incentive-based or 
managed formularies are becoming more popular because they combine 
flexibility and greater cost-control features than open formularies. A 
closed formulary limits insurance coverage to the formulary drugs and 
requires enrollees to pay the full cost of nonformulary drugs 
prescribed by their physicians.
    Another way in which the market has been transformed is through the 
use of pharmacy benefit managers (PBM) by health plans and insurers to 
administer and manage prescription drug benefits. PBMs offer a range of 
services, including prescription claims processing, mail-service 
pharmacy, formulary development and management, pharmacy network 
development, generic substitution incentives, and drug utilization 
review. PBMs also negotiate discounts and rebates on prescription drugs 
with manufacturers.
   expanding access to prescription drugs involves difficult design 
                               decisions
    Expanding access to more affordable prescription drugs could 
involve either subsidizing prescription drug coverage or allowing 
beneficiaries access to discounted pharmaceutical prices. The design of 
a drug coverage option, that is, the scope of the benefit, the covered 
population, and the mechanisms used to contain costs, as well as its 
implementation will determine the effect of the option on 
beneficiaries, Medicare or federal spending, and the pharmaceutical 
market. A new benefit would need to be crafted to balance competing 
concerns about the sustainability of Medicare, federal obligations, and 
the hardship faced by some beneficiaries. Similarly, the effect of 
granting some beneficiaries access to discounted prices will hinge on 
details such as the price of the drugs after the discount, how 
discounts are determined and secured, and which beneficiaries are 
eligible.
    The relative merits of any approach should be carefully assessed. 
We suggest that the following five criteria be considered in evaluating 
any option. (1) Affordability: an option should be evaluated in terms 
of its effect on public outlays for the long term. (2) Equity: an 
option should provide equitable access across groups of beneficiaries 
and be fair to affected providers. (3) Adequacy: an option should 
provide appropriate beneficiary incentives for prudent utilization, 
support standard treatment options for beneficiaries, and not impede 
effective and clinically meaningful innovations. (4) Feasibility: an 
option should incorporate such administrative essentials as 
implementation and cost and quality monitoring techniques. (5) 
Acceptance: an option should account for the need to educate the 
beneficiary and provider communities about its costs and the realities 
of trade-offs required by significant policy changes.
Adding a Medicare Benefit
    Expanding Medicare coverage to include prescription drugs would 
entail numerous benefit design decisions that would affect the cost of 
this expansion as well as its acceptability. A basic design decision 
concerns whether financial assistance provided for the benefit would be 
targeted to those with the greatest need--owing to a lack of existing 
drug coverage, high drug expenditures, or poverty--or whether the 
public financial subsidies would be available to all beneficiaries. The 
President's proposal extends coverage to all beneficiaries, with 
greater government subsidies for the poor. The Breaux-Frist Medicare 
reform proposal incorporates optional drug coverage, which is 
subsidized fully for the poor and partially for others. The generosity 
of the benefit--the extent of beneficiary copayments, coverage limits, 
and catastrophic protections--will also be a major factor in assessing 
the impact of this benefit on the Medicare program. The President's 
benefit design incorporates 50 percent beneficiary copayments; an 
annual benefit limit; and a cap on catastrophic drug costs, which is 
yet to be designed. Under the Breaux-Frist approach, competing health 
plans could design their own copayment structure, with requirements on 
the benefit's actuarial value but no provision to limit beneficiary 
catastrophic drug costs.
    Benefit cost-control provisions for the traditional Medicare 
program may present some of the thorniest drug benefit design 
decisions. Recent experience provides two general approaches. One would 
involve the Medicare program obtaining price discounts from 
manufacturers. Such an arrangement could be modeled after Medicaid's 
drug rebate program. While the discounts in aggregate would likely be 
substantial, this approach lacks the flexibility to achieve the 
greatest control over spending. It could not effectively influence or 
steer utilization because it does not include incentives that would 
encourage beneficiaries to make cost-conscious decisions. The second 
approach would draw from private sector experience in negotiating price 
discounts from manufacturers in exchange for shifting market share. 
Some plans and insurers employ PBMs to manage their drug benefits, 
including claims processing, negotiating with manufacturers, 
establishing lists of drug products that are preferred because of 
efficacy or price, and developing beneficiary incentive approaches to 
control spending and use. Applying these techniques to the entire 
Medicare program, however, would be difficult because of its size, the 
need for transparency in its actions, and the imperative for equity for 
its beneficiaries.
Medicaid Programs Rely on Rebates and Have Limited Utilization Controls
    As the largest government payer for prescription drugs, Medicaid 
drug expenditures account for about 17 percent of the domestic 
pharmaceutical market. Before the enactment of the Medicaid drug rebate 
program under the Omnibus Budget Reconciliation Act of 1990 (OBRA), 
state Medicaid programs paid close to retail prices for outpatient 
drugs. Other large purchasers, such as HMOs and hospitals, negotiated 
discounts with manufacturers and paid considerably less.
    The rebate program required drug manufacturers to rebate to state 
Medicaid programs a percentage off of the average price wholesalers pay 
manufacturers. The rebates were based on a percentage reduction that 
reflects the lowest or ``best'' prices the manufacturer charged other 
purchasers and the volume of purchases by Medicaid recipients. In 
return for the rebates, state Medicaid programs must cover all drugs 
manufactured by pharmaceutical companies that entered into rebate 
agreements with HCFA.12
---------------------------------------------------------------------------
    \12\ OBRA 1990 allowed the states to exclude certain classes of 
drugs.
---------------------------------------------------------------------------
    After the rebate program's enactment, a number of market changes 
affected other purchasers of prescription drugs and the amount of the 
rebates that Medicaid programs received. Drug manufacturers 
substantially reduced the price discounts they offered to many large 
private purchasers, such as HMOs. Therefore, the market quickly 
adjusted by increasing drug prices to compensate for rebates obtained 
by the Medicaid program.
    Although the states have received billions of dollars in rebates 
from drug manufacturers since OBRA's enactment, state Medicaid 
directors have expressed concerns about the rebate program. The 
principal concern involves OBRA's requirement to provide access to all 
the drugs of every manufacturer that offers rebates, which limits the 
utilization controls Medicaid programs can use at a time when 
prescription drug expenditures are rapidly increasing. Although the 
programs can require recipients to obtain prior authorization for 
particular drugs and can impose monthly limits on the number of covered 
prescriptions, they cannot take advantage of other techniques, such as 
incentive-based formularies, to steer recipients to less expensive 
drugs. The few cost-control strategies available to state Medicaid 
programs can add to the administrative burden on state Medicaid 
programs.
Other Payers Employ Various Techniques to Control Expenditures
    Other payers, such as private and federal employer health plans and 
Medicare+Choice plans, have taken a different approach to managing 
their prescription drug benefits. They typically use beneficiary 
copayments to control prescription drug use, and they use formularies 
to both control use and obtain better prices by concentrating purchases 
on selected drugs. In many cases, these plans and insurers retain a 
PBM's services to manage their pharmacy benefit and control spending.
    Beneficiary cost-sharing plays a central role in attempting to 
influence drug utilization. Copayments are frequently structured to 
influence both the choice of drugs and the purchasing arrangements. 
While formulary restrictions can channel purchases to preferred drugs, 
closed formularies, which provide reimbursement only for preferred 
drugs, have generated substantial dissatisfaction among consumers. As a 
result, many plans link their cost-sharing requirements and formulary 
lists. The fastest growing trend today is the use of a formulary that 
covers all drugs but that includes beneficiary cost-sharing that varies 
for different drugs--typically a smaller copayment for generic drugs, a 
larger one for preferred drugs, and an even larger one for all other 
drugs. Reduced copayments have also been used to encourage enrollees 
using maintenance drugs for chronic conditions to obtain them from 
particular suppliers, like a mail-order pharmacy.
    Plans and insurers have turned to PBMs for assistance in 
establishing formularies, negotiating prices with manufacturers and 
pharmacies, processing beneficiaries' claims, and reviewing drug 
utilization. Because PBMs manage drug benefits for multiple purchasers, 
they often may have more leverage than individual plans in negotiating 
prices through their greater purchasing power.
    Traditional fee-for-service Medicare has generally established 
reimbursement rates for services like those provided by physicians and 
hospitals and then processed and paid claims with few utilization 
controls. Adopting some of the techniques used by private plans and 
insurers might help better control costs. However, how to adapt those 
techniques to the characteristics and size of the Medicare program 
raises questions.
    Negotiated or competitively determined prices would be superior to 
administered prices only if Medicare could employ some of the 
utilization controls that come from having a formulary and differential 
beneficiary cost-sharing. In this manner, Medicare would be able to 
negotiate significantly discounted prices by promising to deliver a 
larger market share for a manufacturer's product. Manufacturers would 
have no incentive to offer a deep discount if all drugs in a 
therapeutic class were covered on the same terms. Without a promised 
share of the Medicare market, these manufacturers might reap greater 
returns from charging higher prices and by concentrating marketing 
efforts on physicians and consumers to influence prescribing patterns.
    Implementing a formulary and other utilization controls could prove 
difficult for Medicare. Developing a formulary involves determining 
which drugs are therapeutically equivalent so that several from each 
class can be included. Plans and PBMs currently make those 
determinations privately--something that would not be possible for 
Medicare, which must have transparent policies that are determined 
openly. Given the stakes involved in selecting drugs, one can imagine 
the intensive efforts to offer input to and scrutinize the selection 
process.
    Medicare may also find it impossible to delegate this task to one 
or multiple PBMs. A single PBM contractor would likely be subject to 
the same level of scrutiny as the program. Such scrutiny could 
compromise the flexibility PBMs have used to generate savings. An 
alternative would be to grant flexibility to multiple PBMs that are 
each responsible only for a share of the market. Contracting with 
multiple PBMs, though, raises other issues. If each PBM has exclusive 
responsibility for a geographic area, beneficiaries who need certain 
drugs could be advantaged or disadvantaged merely because of where they 
live. If multiple PBMs operated in each area, beneficiaries could 
choose one to administer their drug benefit. This raises questions 
about how to inform beneficiaries of the differences in each PBM's 
policies and whether and how to risk-adjust payments to PBMs for 
differences in the health status of the beneficiaries using them.
Extending Federal Price Discounts to Beneficiaries
    Another option before the Congress would allow Medicare 
beneficiaries to purchase prescription drugs at the lowest price paid 
by the federal government. Because of their large purchasing power, 
federal agencies, such as, the Departments of Veterans Affairs (VA) and 
Defense (DOD), have access to prescription drug prices that often are 
considerably lower than retail prices. Extending these discounts to 
Medicare beneficiaries, or some groups of beneficiaries, could have a 
measurable effect on lowering their out-of-pocket spending, although 
whether this would adequately increase access or raise prices paid by 
other purchasers that negotiate drug discounts is unknown.
    Typically, federal agencies obtain prescription drugs at prices 
listed in the federal supply schedule (FSS) for 
pharmaceuticals.13 FSS prices represent a significant 
discount off the prices drug manufacturers charge 
wholesalers.14 Under the Veterans Health Care Act of 1992, 
drug manufacturers must make their brand-named drugs available to 
federal agencies at the FSS price in order to participate in the 
Medicaid program. 15 The act requires that the FSS price for 
VA, DOD, the Public Health Service, and the Coast Guard be at least 24 
percent below the price that the manufacturers charge 
wholesalers.16
---------------------------------------------------------------------------
    \13\ The FSS for pharmaceuticals is a price catalog currently 
containing over 17,000 pharmaceutical products available to federal 
agencies.
    \14\ FSS prices are set through negotiations between VA, on behalf 
of the government, and drug manufacturers and are based on the prices 
that manufacturers offer their most favored nonfederal customers.
    \15\ The act covers single-source drugs, innovator multiple-source 
drugs, insulin, and biological products such as vaccines and 
antitoxins. The act does not cover noninnovator multiple-source or 
generic drugs.
    \16\ The act requires that manufacturers sell drugs covered by the 
act at no more that 76 percent of the nonfederal average manufacturer's 
price, a level referred to as the federal ceiling price. The nonfederal 
average manufacturer's price is the weighted average price of each 
single form and dosage unit of a drug that is paid by wholesalers in 
the United States to a manufacturer, taking into account any cash 
discounts or similar price reductiions. Prices paid by the federal 
government are excluded from this calculation.
---------------------------------------------------------------------------
    Although most federal prescription drug purchases are made at FSS 
prices, in some cases, federal agencies are able to purchase drugs at 
even lower prices. For example, VA has used national contracts awarded 
on a competitive basis for specific drugs considered therapeutically 
interchangeable. These contracts enable VA to obtain larger discounts 
from manufacturers by channeling greater volume to certain 
pharmaceutical products.
    Providing Medicare beneficiaries access to the lowest federal 
prices could result in important out-of-pocket savings to those without 
coverage who are paying close to retail prices. However, concerns exist 
that extending federal discounts to Medicare beneficiaries could lead 
to price increases to federal agencies and other purchasers since the 
discount is based on prices determined by manufacturers. Federal 
efforts to lower Medicaid drug prices demonstrate the potential for 
this to occur. While it is not possible to predict how federal drug 
prices would change if Medicare beneficiaries are given access to them, 
the larger the market that seeks to take advantage of these prices, the 
greater the economic incentive would be for drug manufacturers to raise 
federal prices to limit the impact of giving lower prices to more 
purchasers.
 expanding benefits needs to be considered in light of larger medicare 
                            fiscal concerns
    The current Medicare program, without improvements, is ill suited 
to serve future generations of seniors and eligible disabled Americans. 
On the one hand, the program is fiscally unsustainable in its present 
form, as the disparity between program expenditures and program 
revenues is expected to widen dramatically in the coming years. On the 
other hand, Medicare's benefit package contains gaps in desired 
coverage, most notably the lack of outpatient prescription drug 
coverage, compared with private employer coverage. Any option to 
modernize the benefits runs the risk of exacerbating the fiscal 
imbalance of the programs. That is why we believe that expansions 
should be made in the context of overall program reforms that are 
designed to make the program more sustainable over the long term. Any 
discussions about expanding beneficiary access to prescription drugs 
should carefully consider targeting financial help to those most in 
need and minimizing the substitution of public funds for private funds. 
Employers that offer drug coverage through a retiree health plan may 
choose to adapt their health coverage if a Medicare drug benefit is 
available. A key characteristic of America's voluntary, employer-based 
system of health insurance is an employer's freedom to modify the 
conditions of coverage or to terminate benefits.
Medicare's Financial Condition
    Unlike private trust funds that can set aside money for the future 
by investing in financial assets, the Medicare Hospital Insurance (HI) 
Trust Fund--which pays for inpatient hospital stays, skilled nursing 
care, hospice, and certain home health services--is essentially an 
accounting device. It allows the government to track the extent to 
which earmarked payroll taxes cover Medicare's HI outlays. In serving 
the tracking purpose, the 1999 Trustees' annual report showed that 
Medicare's HI component has been, on a cash basis, in the red since 
1992, and in fiscal year 1998, earmarked payroll taxes covered only 89 
percent of HI spending. In the Trustees' report, issued in March 1999, 
projected continued cash deficits for the HI trust fund. (See fig. 3.)

[GRAPHIC] [TIFF OMITTED]62971.036

    When the program has a cash deficit, as it did from 1992 through 
1998, Medicare is a net claimant on the Treasury--a threshold that 
Social Security is not currently expected to reach until 2014. To 
finance these cash deficits, Medicare drew on its special issue 
Treasury securities acquired during the years when the program 
generates a cash surplus. In essence, for Medicare to ``redeem'' its 
securities, the government must raise taxes, cut spending for other 
programs, or reduce the projected surplus. Outlays for Medicare 
services covered under Supplementary Medical Insurance (SMI)--physician 
and outpatient hospital services, diagnostic tests, and certain other 
medical services and supplies--are already funded largely through 
general revenues.
    Although the Office of Management and Budget (OMB) has recently 
reported a $12 billion cash surplus for the HI program in fiscal year 
1999 due to lower than expected program outlays, the long-term 
financial outlook for Medicare is expected to deteriorate. Medicare's 
rolls are expanding and are projected to increase rapidly with the 
retirement of the baby boomers. Today's elderly make up about 13 
percent of the total population; by 2030, they will comprise 20 percent 
as the baby boom generation ages and the ratio of workers to retirees 
declines from 3.4 to 1 today to roughly 2 to 1.
    Without meaningful reform, the long-term financial outlook for 
Medicare is bleak. Together, Medicare's HI and SMI expenditures are 
expected to increase dramatically, rising from about 12 percent in 1999 
to about a quarter of all federal revenues by mid-century. Over the 
same time frame, Medicare's expenditures are expected to double as a 
share of the economy, from 2.5 to 5.3 percent, as shown in figure 4.
[GRAPHIC] [TIFF OMITTED]62971.037

    The progressive absorption of a greater share of the nation's 
resources for health care, like Social Security, is in part a 
reflection of the rising share of elderly population, but Medicare 
growth rates also reflect the escalation of health care costs at rates 
well exceeding general rates of inflation. Increases in the number and 
quality of health care services have been fueled by the explosive 
growth of medical technology. Moreover, the actual costs of health care 
consumption are not transparent. Third-party payers generally insulate 
consumers from the cost of health care decisions. In traditional 
Medicare, for example, the impact of the cost-sharing provisions 
designed to curb the use of services is muted because about 80 percent 
of beneficiaries have some form of supplemental health care coverage 
(such as Medigap insurance) that pays these costs. For these reasons, 
among others, Medicare represents a much greater and more complex 
fiscal challenge than even Social Security over the longer term.
    When viewed from the perspective of the entire budget and the 
economy, the growth in Medicare spending will become progressively 
unsustainable over the longer term. Our updated budget simulations show 
that to move into the future without making changes in the Social 
Security, Medicare, and Medicaid programs is to envision a very 
different role for the federal government. Assuming, for example, that 
the Congress and the President adhere to the often-stated goal of 
saving the Social Security surpluses, our long-term model shows a world 
by 2030 in which Social Security, Medicare, and Medicaid increasingly 
absorb available revenues within the federal budget. Under this 
scenario, these programs would absorb more than three-quarters of total 
federal revenue. (See fig. 5.) Budgetary flexibility would be 
drastically constrained and little room would be left for programs for 
national defense, the young, infrastructure, and law enforcement.
[GRAPHIC] [TIFF OMITTED]62971.038

[GRAPHIC] [TIFF OMITTED]62971.039

    While the problems facing the Social Security program are 
significant, Medicare's challenges are even more daunting. To close 
Social Security's deficit today would require a 17 percent increase in 
the payroll tax, whereas the HI payroll tax would have to be raised 50 
percent to restore actuarial balance to the HI trust fund. This

analysis, moreover, does not incorporate the financing challenges 
associated with the SMI and Medicaid programs.
    Early action to address the structural imbalances in Medicare is 
critical. First, ample time is required to phase in the reforms needed 
to put this program on a more sustainable footing before the baby 
boomers retire. Second, timely action to bring costs down pays large 
fiscal dividends for the program and the budget. The high projected 
growth of Medicare in the coming years means that the earlier the 
reform begins, the greater the savings will be as a result of the 
effects of compounding.
    The actions necessary to bring about a more sustainable program 
will no doubt call for some hard choices. Some suggest that the size of 
the imbalances between Medicare's outlays and payroll tax revenues for 
the HI program may well justify the need for additional resources. One 
possible source could be general revenues. Although this may eventually 
prove necessary, such additional financing should be considered as part 
of a broader initiative to ensure the program's long-range financial 
integrity and sustainability.
    What concerns us most is that devoting general funds to the HI 
trust fund may be used to extend HI's solvency without addressing the 
hard choices needed to make the whole Medicare program more sustainable 
in economic or budgetary terms. Increasing the HI trust fund balance 
alone, without underlying program reform, does nothing to make the 
Medicare program more sustainable--that is, it does not reduce the 
program's projected share of GDP or the federal budget. From a 
macroeconomic perspective, the critical question is not how much a 
trust fund has in assets but whether the government as a whole has the 
economic capacity to finance all Medicare's promised benefits--both now 
and in the future. We must keep in mind the unprecedented challenge 
facing future generations in our aging society. Relieving them of some 
of the financial burden of today's commitments would help preserve some 
budgetary flexibility for future generations to make their own choices.
    If more fundamental program reforms are not made, we fear that 
general fund infusions would interfere with the vital signaling 
function that trust fund mechanisms can have for policymakers about 
underlying fiscal imbalances in covered programs. The greatest risk is 
that dedicating general funds to the HI program will reduce the sense 
of urgency that impending trust fund bankruptcy provides to 
policymakers by artificially extending the solvency of the HI program. 
Furthermore, increasing the trust fund's paper solvency does not 
address cost growth in the SMI portion of Medicare, which is projected 
to grow even faster than HI in coming decades, assuming no additional 
SMI benefits.
    The issue of the extent to which general funds are an appropriate 
financing mechanism for the Medicare program would remain important 
under financing arrangements that differed from those in place in the 
current HI and SMI structures. For example, under approaches that would 
combine the two trust funds, a continued need would exist for measures 
of program sustainability that would signal potential future fiscal 
imbalance. Such measures might include the percentage of program 
funding provided by general revenues, the percentage of total federal 
revenues or gross domestic product devoted to Medicare, or program 
spending per enrollee. As such measures were developed, questions would 
need to be asked about the appropriate level of general revenue 
funding. Regardless of the measure chosen, the real question would be 
what actions should be taken when and if the chosen cap is reached.
Long-Term Fiscal Policy Choices
    Beyond reforming the Medicare program itself, maintaining an 
overall sustainable fiscal policy and strong economy is vital to 
enhancing our nation's future capacity to afford paying benefits in the 
face of an aging society. Decisions on how we use today's surpluses can 
have wide-ranging impacts on our ability to afford tomorrow's 
commitments.
    As we know, there have been a variety of proposals to use the 
surpluses for purposes other than debt reduction. Although these 
proposals have various pros and cons, we need to be mindful of the risk 
associated with using projected surpluses to finance permanent future 
claims on the budget, whether they are on the spending or the tax side. 
Commitments often prove to be permanent, while projected surpluses can 
be fleeting. For instance, current projections assume full compliance 
with tight discretionary spending caps. Moreover, relatively small 
changes in economic assumptions can lead to very large changes in the 
fiscal outlook, especially when carried out over a decade. In its 
January 2000 report, 17 CBO compared the actual deficits or 
surpluses for 1986 through 1999 with the first projection it had 
produced 5 years before the start of each fiscal year. Excluding the 
estimated impact of legislation, CBO stated that its errors in 
projecting the federal surplus or deficit averaged about 2.4 percent of 
GDP in the fifth year beyond the current year. For example, such a 
shift in 2005 would mean a potential swing of about $285 billion in the 
projected surplus for that year.
---------------------------------------------------------------------------
    \17\ The Economic and Budget Outlook: Fiscal Years 2001-2010 (CBO, 
Jan. 2000).
---------------------------------------------------------------------------
    Although most would not argue for devoting 100 percent of the 
surplus to debt reduction over the next 10 years, saving a good portion 
of our surpluses would yield fiscal and economic dividends as the 
nation faces the challenges of financing an aging society. Our work on 
the long-term budget outlook illustrates the benefits of maintaining 
surpluses for debt reduction. Reducing the publicly held debt reduces 
interest costs, freeing up budgetary resources for other programmatic 
priorities. For the economy, running surpluses and reducing debt 
increase national saving and free up resources for private investment. 
These results, in turn, lead to stronger economic growth and higher 
incomes over the long term.
    Over the last several years, our simulations illustrate the long-
term economic consequences flowing from different fiscal policy 
paths.18 Our models consistently show that saving all or a 
major share of projected budget surpluses ultimately leads to 
demonstrable gains in GDP per capita. Over a 50-year period, GDP per 
capita is estimated to more than double from present levels by saving 
all or most of projected surpluses, while incomes would eventually fall 
if we failed to sustain any of the surplus. Although rising 
productivity and living standards are always important, they are 
especially critical for the 21st century, for they will increase the 
economic capacity of the projected smaller workforce to finance future 
government programs along with the obligations and commitments for the 
baby boomers' retirement.
---------------------------------------------------------------------------
    \18\ See Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-
98-83, Feb. 25, 1998) and Budget Issues: Analysis of Long-Term Fiscal 
Outlook (GAO/AIMD/OCE-98-19, Oct. 22, 1997).
---------------------------------------------------------------------------
                        concluding observations
    Updating the Medicare benefit package may be a necessary part of 
any realistic reform program to address the legitimate expectations of 
an aging society for health care, both now and in the future. Expanding 
access to prescription drugs could ease the significant financial 
burden some Medicare beneficiaries face because of outpatient drug 
costs. Such changes, however, need to be considered as part of a 
broader initiative to address Medicare's current fiscal imbalance and 
promote the program's longer-term sustainability. Balancing these 
competing concerns may require the best from government-run programs 
and private sector efforts to modernize Medicare for the future. 
Further, the Congress should consider adequate fiscal incentives to 
control costs and a targeting strategy in connection with any proposal 
to provide new benefits such as prescription drugs.
    The Congress and the President may ultimately decide to include 
some form of prescription drug coverage as part of Medicare. Given this 
expectation and the future projected growth of the program, some 
additional revenue sources may in fact be a necessary component of 
Medicare reform. However, it is essential that we not take our eye off 
the ball. The most critical issue facing Medicare is the need to ensure 
the program's long range financial integrity and sustainability. The 
1999 annual reports of the Medicare Trustees project that program costs 
will continue to grow faster than the rest of the economy. Care must be 
taken to ensure that any potential expansion of the program be balanced 
with other programmatic reforms so that we do not worsen Medicare's 
existing financial imbalances.
    Current budget surpluses represent both an opportunity and an 
obligation. We have an opportunity to use our unprecedented economic 
wealth and fiscal good fortune to address today's needs but an 
obligation to do so in a way that improves the prospects for future 
generations. This generation has a stewardship responsibility to future 
generations to reduce the debt burden they will inherit, to provide a 
strong foundation for future economic growth, and to ensure that future 
commitments are both adequate and affordable. Prudence requires making 
the tough choices today while the economy is healthy and the workforce 
is relatively large. National saving pays future dividends over the 
long term, but only if meaningful reform begins soon. Entitlement 
reform is best done with considerable lead-time to phase in changes and 
before the changes that are needed become dramatic and disruptive. The 
prudent use of the nation's current and projected budget surpluses 
combined with meaningful Medicare and Social Security program reforms 
can help achieve both of these goals.
    Mr. Chairman, this concludes my prepared statement. I will be happy 
to answer any questions you or other Subcommittee Members may have.
                    gao contacts and acknowledgments
    For future contacts regarding this testimony, please call Paul L. 
Posner, Director, Budget Issues, at (202) 512-9573 or William J. 
Scanlon, Director, Health Financing and Public Health Issues at (202) 
512-7114. Other individuals who made key contributions include Linda F. 
Baker, Laura A. Dummit, John C. Hansen, Tricia A. Spellman, and James 
R. McTigue.

    Mr. Bilirakis. Thank you, Dr. Scanlon. Thanks to all of 
you.
    Well, Ms. Washington, as you know, I have introduced 
legislation to establish a protection for beneficiaries who 
have high annual drug costs, the sickest. Even though we are 
talking about it being outside of the scope of the Medicare 
program, at this point in time it would include all Medicare 
beneficiaries who qualify, so it does hit this universal 
coverage idea, by the way, which has been mentioned in the 
past.
    The President's budget proposed to set aside $35 billion 
for that purpose. And maybe this is a little premature, and if 
it is, certainly I won't press you, but can you elaborate on 
the administration's specific plans in that regard?
    Ms. Washington. Yes, sir. As you said, we agree that 
protecting beneficiaries with high out-of-pocket costs is 
important, and it was one of the areas that we wanted to 
improve on in the proposal that we submitted last year. We 
don't have a specific benefit design. We want to work with the 
Congress to come up with a benefit design that could be 
affordable for the program and the beneficiaries, to protect 
them from some of these high out-of-pocket costs. We think that 
the $35 billion that we set aside will be enough to craft a 
benefit that offers significant protection. But other than 
that, we want to work with you on the details.
    Mr. Bilirakis. Other than that, you have nothing.
    Dr. Hoadley, do you have anything to add to that?
    Mr. Hoadley. No.
    Mr. Bilirakis. Dr. Scanlon, add anything to it?
    Mr. Scanlon. Mr. Chairman, we believe very strongly that 
catastrophic protection is one of the important things to think 
about----
    Mr. Bilirakis. We don't use that word. We don't use 
``catastrophic.''
    Mr. Scanlon. Sorry. Stop-loss protection. But I would also 
point out that stop-loss protection for Medicare in general is 
also an important thing to think about, because of the two 
glaring omissions from the Medicare benefit package that was 
enacted in 1965. Outpatient prescription drugs may be one, and 
beneficiaries' cost-sharing liability, which can be quite high, 
is the other.
    Mr. Bilirakis. Well, thanks. Some have suggested that 
enactment of targeted prescription drug assistance, not just in 
our plan but any targeted prescription drug assistance, would 
undermine broader reform to preserve Medicare for the future. 
You know, a similar ``all or nothing'' argument was advanced 
during the debate on health care reform in 1994, and then the 
end result was what? Well, it was that Americans in need of 
health insurance were forced to wait 2 years for enactment of 
legislation to provide portability of insurance and coverage 
for preexisting conditions.
    We must not repeat that mistake, and this is why I feel so 
very strongly about it. Now, you know, we have seen the charts 
here, we have talked about it previously. We all know that 
Medicare faces a severe financial crisis. The impending 
bankruptcy of the program, I would think, would be sufficient 
incentive to make sure that regardless of whether we advance 
some sort of targeted prescription drug assistance, that it is 
not going to take away from the need to reform Medicare 
consistent with all of the discussions that have taken place.
    I would like to ask all of you to comment regarding that. 
You know, I represent such a strong senior citizen area. I am a 
big supporter of Medicare. And under perfect circumstances, 
whatever the coverage might be should be universal to all 
Medicare beneficiaries, but we don't have perfect 
circumstances. We face the bankruptcy of a program that we have 
to take into consideration as far as spending is concerned.
    You know, I just have trouble quite understanding this 
business of ``all or nothing'' when in fact there are people 
out there who are hurting right now who can be helped in the 
meantime, until we can get to the point of reforming the 
system, which is going to take a while, and in this political 
year many people feel that we are probably not going to be able 
to get around to it. I hope that they are wrong.
    So, Ms. Washington, again it is a policy issue, and I don't 
know whether it is something you want to address.
    Ms. Washington. Well, I think that we agree. The President 
agrees that the problem really has two parts. It is modernizing 
the benefit package with prescription drugs, and it is ensuring 
that the solvency of the program continues in the long run. And 
the President, as you know, has proposed a plan that addresses 
both circumstances.
    I think there are particular problems for prescription 
drugs for the low-income, but I believe we could work together 
to enact a universal drug benefit this year. As you know, over 
half of the beneficiaries who don't have coverage do have 
incomes over $150,000, and I think that part of the success of 
Medicare is the fact that it is available to everyone. So I 
think you can work together to design----
    Mr. Bilirakis. About half of those who don't have--forgive 
me for interrupting--who don't have coverage have incomes of 
over $150,000?
    Ms. Washington. Sorry. I misspoke. 150 percent of poverty, 
which is about $17,000 for a couple. I got 150 and then I got 
sidetracked.
    Mr. Bilirakis. You had the figure right, at least, right?
    Ms. Washington. But I think we can work together to do a 
universal benefit this year, affordable to both the 
beneficiaries and the program.
    Mr. Bilirakis. Don't we wish that were truly the case, 
though?
    Dr. Scanlon, my time has expired, but if you have 
anything----
    Mr. Scanlon. But Chairman, I am afraid I can't offer you 
much advice on this decision. I think as the role of the 
analyst, what we can do is provide you the elements of the 
bigger picture. And I recognize that sometimes incremental 
approaches are easier to accomplish in the short term, but 
keeping the focus on the bigger picture and knowing how the 
incremental strategy will build to be able to deal with that 
broader question I think is very important. There is no debate 
that resources are a portion of this question, and it is your 
decision as to how those can be used best.
    Mr. Bilirakis. Well, thank you for all the help that we 
always get from GAO.
    Mr. Waxman?
    Mr. Waxman. Thank you very much, Mr. Chairman.
    Ms. Washington, just so we understand how severe this 
problem is of prescription drugs for the elderly, as I 
understand it, only about half the beneficiaries have coverage 
throughout the year. Is that an accurate statement?
    Ms. Washington. That is right.
    Mr. Waxman. And that coverage is not dependable. Employers 
are cutting back. Managed care plans are cutting back if not 
eliminating drug coverage. And then the Medigap policies are 
very, very costly. Some people just can't afford a Medigap 
policy.
    Ms. Washington. Right. That is true.
    Mr. Waxman. Since the administration testified last year on 
this issue in September, I believe you have gotten some new 
information about what is happening in managed care plans with 
respect to the drug coverage they offer. Are managed care drug 
benefits expanding or shrinking?
    Ms. Washington. Unfortunately, Congressman Waxman, managed 
care drug benefits are shrinking. This year, 70 percent of the 
plans are capping their drug benefit at or below $1,000 for the 
year, and of those, one-third of total plans cap benefits at 
$500 or lower. This last figure has increased by 50 percent 
from the previous year, 1999.
    Mr. Waxman. So we have large numbers of seniors without 
prescription drug coverage or with undependable coverage. It 
seems to me that we are in the same situation with regard to 
drug coverage that we were in 1965 with respect to 
hospitalization coverage, which drove government to enact the 
Medicare program, primarily to cover hospital care because 
seniors just couldn't afford it and didn't have it available to 
them. Is that an accurate statement?
    Ms. Washington. That is right, sir. Approximately 50 
percent of people in 1963 had access to hospital insurance, and 
that is about where we are with Medicare drug coverage today.
    Mr. Waxman. Now, Dr. Scanlon, in 1963, 1964 and then 1965, 
the Congress could have said there is a bigger picture, and 
therefore we shouldn't solve this problem until we deal with 
the bigger picture. That could have kept the Congress from 
doing anything, couldn't it? That is just sort of a rhetorical 
question.
    Mr. Scanlon. I can't give you the details. I know. I can't 
give you the details of the bigger picture then, but I think 
that our picture now is quite different than it was in 1965. 
Medicare has absorbed a much larger share of our economy than 
it did in 1965, and I think that in 1965 we would have 
certainly included drug coverage if we had recognized the role 
that drugs were going to play in medical care.
    But the reality was that medical care was so different 
then, and that was in part how we approached Medicare. I think 
over time we have refined Medicare dramatically to reflect the 
fact that medical science and the delivery of medical care has 
changed quite a bit.
    Mr. Waxman. You would think, then, an insurance program for 
seniors in this country ought to have prescription drugs?
    Mr. Scanlon. If we were designing an insurance program 
today, it should have prescription drug coverage. Virtually the 
entire elderly population uses some drugs. Those that are going 
to end up with catastrophically high drug costs are a smaller 
segment and you don't necessarily have the ability to plan for 
that or have the ability to save for that. That's why having 
insurance is an extremely positive benefit for beneficiaries.
    Mr. Waxman. We could have taken that approach with Medicare 
in 1965 and said, well, just cover catastrophic costs for 
hospitalization and doctor expenses, and let people figure if 
they can come up with the money before they get that coverage 
triggered in, couldn't we?
    Mr. Scanlon. I am not saying that we should have only a 
catastrophic drug benefit. I think because of catastrophic 
costs, a drug benefit is extremely important. Having a drug 
benefit that begins at a lower level is also important to 
prevent the exacerbation of conditions, so that you do not 
incur other kinds of higher expenses. I think it is also 
important, though, that there be a sharing of the burden of 
this benefit.
    Mr. Waxman. Well, we want to share the burden, so we want 
to get as many people covered as possible in any kind of 
voluntary prescription drug government program, wouldn't we? 
You would agree that if we are going to do it, we should do it 
for all Medicare beneficiaries, not just the 150 percent of 
poverty level?
    Mr. Scanlon. I think that the decision as to whether you do 
it for all Medicare beneficiaries is one that you have to base 
on resources, and this use versus other uses of those 
resources, and that I think is a decision we can't make at GAO 
for you.
    Mr. Waxman. I have seen articles with headlines that say 
``GAO Says Don't Provide A Prescription Drug Coverage Under 
Medicare Until All Of Medicare Is Modernized.'' Is that a 
recommendation or just a reporter's interpretation of what your 
statements have been?
    Mr. Scanlon. I think those are reporters' interpretations 
out of context, because the GAO position has been that we 
should think about modernizing the Medicare program in its 
totality. Prescription drug coverage is one aspect of it. Stop-
loss coverage is another. Making the purchases of all services 
more efficient is a third. And I think those are the major 
principles of GAO's position on this.
    Mr. Waxman. So we have lots of tradeoffs, but ultimately it 
is up to the elected officials to make the public policy calls. 
We are not going to solve all the world's problems at once, so 
we have to decide what is the most severe one facing us, and 
the most severe one facing the elderly in this country, I 
believe, is the lack of coverage, not the crisis that may be in 
2014 or 2030. That is my opinion.
    Mr. Greenwood [presiding]. I think the gentleman's time has 
expired. The Chair recognizes himself for 5 minutes.
    Ms. Washington, in his State of the Union address, the 
President recognized a senior citizen in the gallery whose name 
was Pat Brown and cited him as an example, and noted that he 
had an annual prescription drug cost of $4,200 and he had no 
drug coverage. Could you, in order to illustrate the 
President's proposal, tell us how her--excuse me--Mrs. Brown 
would be helped by the President's proposal.
    Ms. Washington. Yes, sir. The President's proposal offers 
prescription drug coverage up to a limit each year, and the 
premium for beneficiaries is subsidized by the government at 50 
percent and the beneficiary pays the other 50 percent. Drugs 
are covered up to a limit of $2,000 in the first year and 
$5,000 when fully phased in.
    And so, Mrs. Brown would receive assistance. She would pay 
the monthly premium, which in 2003 would be $26 a month. And 
then, she would receive her drugs at a discount that would be 
offered by the pharmacy benefit manager, or the HMO that she 
belongs to, and she would pay up to a 50 percent co-pay for the 
cost of the drugs that she receives each year.
    Mr. Greenwood. Let me see if our math is the same here. 
According to my math, she would pay, in 2003 she would pay 
$3,500 out of her pocket under the Clinton plan, of the $4,200, 
because the government's contribution is capped at $1,000. She 
would be paying approximately $300 in premiums, plus one-half 
of the $2,000 maximum benefit, or $2,200, and therefore her 
uncovered drug spending would be $3,500. Do we have different 
mathematicians working for us here?
    Ms. Washington. Well, I think there are two points. The 
first point is that if she is uninsured now or she participates 
in a Medigap plan, she is not realizing the benefits of the 
discounts that the pharmacy benefit managers can give her. So, 
her costs would hopefully be lower with drug coverage. I think 
when the benefit is fully phased in at $5,000, she would 
receive more help than she would in the first year.
    Mr. Greenwood. If she lives that long, and we hope she 
does.
    Mr. Waxman. Without a drug program, she might not.
    Mr. Greenwood. Right, right. Well, without a good drug 
program she might not, that is the problem. And of course I 
think this goes to one of the essential dilemmas here, is with 
finite resources do we want to make sure that we cover more of 
her costs and focus this on the lower end of the socioeconomic 
scale, or provide a relatively thin coverage, at least for the 
first several years, to everyone. That is a basic philosophical 
consideration for us.
    You mentioned the fact that you hadn't, I think it was in 
response to a question, that the President and the 
administration hadn't developed a benefits package, and that 
you intended to work with the Congress, you hoped to work with 
Congress on that. In fact, it is my understanding that, A, we 
have no legislative language from the White House at all with 
regard to the President's proposal; and, B, I am not aware, and 
I am one of the guys supposedly writing this legislation, I am 
not aware of any overtures from the administration to work with 
the Congress.
    And let me say to you that it is my fervent hope that what 
we end up doing is having a package on the President's desk 
that we have negotiated with the administration, that we all 
can feel good about, Republicans and Democrats, and get signed 
into law this year. But to do that I think we are going to--
time is obviously very limited--we are going to have to see 
language from the administration, some very concrete and 
detailed language. We are really going to have to establish a 
dialog here, where representatives of the administration and 
representatives of the Congress, both chambers, both sides of 
the aisle, are working toward that common goal, because we 
won't get it otherwise.
    Could you comment on that?
    Ms. Washington. Yes, sir. Back in July, we released a very 
detailed plan of the President's proposal that was about 40 
pages long. We are working on legislative language now, and I 
can certainly get back to you about what the plans are for 
that. But we would be happy to sit down and work with this 
committee, like we have in the past, to discuss the issues and 
see what we can do.
    Mr. Greenwood. Well, I will personally take you up on that 
because I believe that that is a dialog that has to begin 
sooner rather than later, and I have been around here long 
enough to know that when it happens later, it usually is too 
late and we end up with a veto or we end up with stalemate and 
a lot of political finger-pointing, and I think we ought to 
avoid that.
    I see no other members--oh, Dr. Ganske is recognized for 5 
minutes.
    Mr. Ganske. I want to get back to the macro level here. I 
appreciate your testimony.
    It looks to me like today Medicare expansion of benefits is 
even more difficult than it was in 1988, 1989, and here is why. 
We have, I think, a very firm bipartisan commitment to protect 
Social Security. That makes deficit spending for new programs 
very difficult.
    Second, how do you expand coverage for some when others 
have no coverage at all, i.e., the uninsured, the totally 
uninsured?
    And, third, as Mr. Scanlon's first chart points out, we are 
getting closer and closer to Medicare insolvency, and so what 
should our priorities be? Should our first priority be to 
protect the current program? Or should it be to expand the 
current program and then push that insolvency date closer?
    Now, the President's plan recommends spending roughly $170 
billion over 10 years, I think, $168.5 billion or something 
like that. Senator Breaux's plan talks about $70 billion. 
Earlier today I talked about how much this surplus really could 
be.
    And now that I have got the CBO paper in front of me, you 
know, if you look at the projections for spending just to keep 
up with inflation, not counting emergency spending, then you 
get about $830 billion in surplus over 10 years. So knock off 
about another $200 billion for emergency spending, and then 
knock off about another $100 billion for a bipartisan 
commitment for increased spending on defense. I hear that all 
the time from both sides of the aisle, from the President. So 
you could knock off about, you know, another $300 billion just 
for that. So now you are down to about $500 billion over 10 
years.
    Okay. What I am saying is this: I am terribly frustrated by 
this process, because we don't know, A, how much a real 
prescription benefit is going to cost, because we don't know 
what new drugs are coming along, and the President's plan is 
open-ended. You are talking about 50 percent of expenses but we 
don't know what the expenses are. I mean, it could be a lot 
more than what we are projecting.
    And we don't know, because we don't have a budget at this 
point in time, how much we are projecting for being able to 
cover, say, the uninsured. If we did nothing more than make an 
effort to get those who already qualify for Federal programs 
into the programs, that is an additional significant cost, much 
less an expansion.
    And so, you know, I guess I would like your comments on 
this. How can we justify this, proposing these programs, 
without a context of a budget that we have agreed on in a 
bipartisan fashion? Mr. Scanlon?
    Mr. Scanlon. Dr. Ganske, I think in part we need to go and 
look at that bigger picture again, and it is not just the issue 
of this financing picture but it is the issue of the operation 
of the Medicare program. Because I think that in both the 
President's proposal and in the Breaux-Frist bill and in the 
work of the commission, we were talking about not only 
modernizing this program in terms of adding a drug benefit and 
stop-loss coverage but also trying to make it more efficient, 
and hope that we would get savings there that would both be 
able to cover the cost of some of these benefits as well as to 
make it more sustainable for the future.
    Now, there is a big ``if'' there. I don't think that we 
have the experience or the analysis yet to feel comfortable 
that we are going to be able to do this, but I would agree with 
everything that you said in terms of the dilemma we have in the 
tradeoffs. There are significant needs besides drug coverage 
for Medicare beneficiaries, such as the needs of the uninsured, 
and what is done about those while one is thinking about drug 
coverage is a major issue.
    But I am afraid that what we can try to do is provide you 
the information on the relative effects of different approaches 
to this, but when it comes down to having to make a choice 
between the two, I don't have any advice on that.
    Mr. Ganske. Ms. Washington, let me just go back over these 
three points that I made.
    First, do you agree that there is a bipartisan commitment 
to protect Social Security that makes deficit spending for new 
programs very difficulty?
    Mr. Greenwood. Please be brief when you respond, since the 
gentleman's time has expired.
    Ms. Washington. Dr. Ganske, I can't really comment on the 
overall budget structure of the administration.
    Mr. Ganske. The administration doesn't want to see deficit 
spending.
    Ms. Washington. That is correct.
    Mr. Ganske. Okay. And the administration has a real 
commitment to providing coverage to those who don't have any 
insurance, right?
    Ms. Washington. Right. That is correct. We have a 
proposal----
    Mr. Ganske. And the administration has a real commitment to 
making sure that Medicare stays solvent?
    Ms. Washington. Yes, sir.
    Mr. Greenwood. The gentleman's time has expired.
    Mr. Ganske. Mr. Chairman, I would ask for an additional 
minute, unanimous consent.
    Mr. Greenwood. A quick minute.
    Mr. Ganske. Hey, there is only three of us. I am sorry. Mr. 
Burr is down here.
    Mr. Scanlon, we are talking about, you know, trying to do 
basically a number of things in our budget. We are talking 
about tax cuts, we are talking about an expansion of coverage 
for the uninsured, we are talking about prescription drugs and 
expansion of benefits in Medicare, and there are a number of 
other priorities. Can you make a suggestion for me? How can we 
even begin to look at what we should be fashioning for some 
type of drug benefit for those who truly need it, without 
knowing how much money we have to spend, how much money is 
available?
    Mr. Scanlon. I think we can begin by trying to help you in 
terms of understanding what the implications of different 
levels of resources going into this would be, and how those 
resources, different levels of resources, could be targeted, 
and some of the potential consequences of that targeting. But 
beyond that I don't know how to guide you, because I do--I 
mean, I understand your dilemma completely, which is that the 
list of potential uses of both existing revenues and future 
surpluses is quite long and clearly will go well beyond the 
money that is available.
    Mr. Ganske. Thank you.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The gentleman, Mr. Strickland, is recognized 
for 5 minutes for inquiry.
    Mr. Strickland. Thank you. I would like to address this to 
Ms. Washington.
    You mentioned in your testimony that a Medicare benefit 
needs to be universal to avoid adverse risk selection problems, 
and the question I have is, what are the risk selection 
problems that could occur in a drug benefit that is targeted 
only toward certain beneficiaries such as low income seniors?
    Ms. Washington. Well, risk selection happens when you are 
targeting the benefit only to a certain group or you are making 
it unaffordable for others to join the program. What happens 
is, when you can't share the risk among the maximum amount of 
beneficiaries possible, the cost keeps going up and the 
relatively healthy people will find that it is not affordable 
to them, and that cycle spirals out of control, so at a certain 
point the benefit isn't really sustainable because no one can 
afford it.
    Mr. Strickland. And that gets to the second part of my 
question, and that is the level of subsidy that would have to 
be available to make benefits affordable to low income folks. 
And looking at the President's plan, I guess the major concern 
that I have about it is, is the benefit attractive enough to 
attract sufficient numbers of voluntary participants to keep 
this adverse selection process from occurring? And I assume the 
administration has considered that, but it seems to me that the 
benefit package is minimal at best, and there are seniors that 
would find it inadequate and consequently find it not all that 
appealing to voluntarily participate. Is that a concern?
    Ms. Washington. Well, what we tried to do in designing the 
benefit is to make it attractive enough so that most 
beneficiaries would participate, and we set the subsidy level 
at 50 percent in order to achieve that, but at the same time 
trying to make it affordable for the program. We have a series 
of protections for the lowest income beneficiaries, so that 
people under 135 percent of poverty have their premiums and 
cost-sharing covered, and then people between 135 and 150 
percent of poverty receive assistance on a sliding scale.
    The addition of the stop-loss protection that we talked 
about earlier would really serve to make the benefit more 
attractive to those people with the highest out-of-pocket 
costs, and that was a concern that we had last year, that is 
the reason why we added that.
    Mr. Strickland. One of the groups that is opposed to the 
administration's initiative has communicated with a number of 
my constituents, and one of the things they charge is that it 
will not be voluntary. They don't do that exactly. They are 
very careful in the words they use and how they use those 
words, but they make reference to the fact that the 
administration has indicated that approximately 80 percent of 
Medicare beneficiaries will choose to participate, and they 
take that estimate as an indication that this program will not 
be voluntary.
    Can you tell me where you came up or how you came up with 
the estimate that approximately 80 percent of Medicare-eligible 
folks would choose to participate?
    Ms. Washington. When we were designing the benefit, we 
consulted with our actuaries about the size of the subsidy and 
the generosity of the benefit package, and what, in their 
opinion, would cause the benefit to be attractive so that 
almost all beneficiaries would participate. That is how we 
settled on the 50 percent subsidy.
    Eighty percent of the beneficiaries are expected to 
participate because we have subsidies for employers to continue 
to offer their private coverage. So, we do think that, as a 
result of the subsidies, employers would take the incentive and 
continue to offer their private retiree coverage for those 
people who have it.
    Mr. Strickland. So the 80 percent estimate is not based 
upon any coercion on the part of this program, but it is based 
on the assumption--and I guess that assumption is arrived at 
through some scientific methodology--that 80 percent would 
choose to participate either because they have no coverage 
currently, or the coverage they have is inadequate, or the 
coverage they have is becoming so expensive they can't keep it, 
or they are afraid their HMO will drop coverage, as many HMOs 
are doing. Is that a fair assessment of the estimate?
    Ms. Washington. Yes, that is correct, sir.
    Mr. Strickland. Thank you.
    No more questions, Mr. Chairman.
    Mr. Greenwood. The gentleman, Mr. Burr, is recognized for 5 
minutes for inquiry.
    Mr. Burr. Thank you, Mr. Chairman. I apologize to the 
witnesses for this schedule today.
    Ms. Washington, let me see if I just understood you 
correctly. Based upon the President's proposal in blueprint 
form, it is estimated that 80 percent of seniors would choose 
the drug option that the President has proposed?
    Ms. Washington. That is correct.
    Mr. Burr. Well, let me run you through a chart. Tell me if 
I am wrong. Based upon the 2002 phase-in, the partial phase-in, 
at $1,000 per beneficiary of drug spending, I see a value to 
the individual who participated of $197.60, and an out-of-
pocket cost of $802.40. Who was it that looked at that and said 
80 percent of the seniors would see value in that?
    Ms. Washington. Well, there are a couple of reasons why we 
would see value in the benefit. First of all, the figures you 
are citing are the first year, and the benefit would----
    Mr. Burr. Well, let me cite 2008. At $1,000, it has a 
``value of the President's plan'' benefit, a negative $134, and 
the out-of-pocket cost, $1,034 for the beneficiary. It actually 
gets worse.
    Ms. Washington. Well, if you look at the costs of drug 
coverage for the average beneficiary and you project those 
forward to when the benefit starts, we do predict that the 
average beneficiary, while the benefit isn't free and we do 
require a 50 percent subsidy and 50 percent premium and 50 
percent co-pays, there would be value to the beneficiary from 
the benefit, both in terms of coverage and in terms of----
    Mr. Burr. Now, you are subsidizing some income level for 
the premium costs, correct, under this plan?
    Ms. Washington. For low income beneficiaries?
    Mr. Burr. Yes, ma'am.
    Ms. Washington. Right.
    Mr. Burr. At what percentage of poverty would you subsidize 
their premium costs?
    Ms. Washington. Beneficiaries under 135 percent of poverty 
would see full coverage for premiums and co-pays, and 
beneficiaries from 135 to 150 percent of poverty would see 
premium assistance based on a sliding scale.
    Mr. Burr. Now, of the individuals that were in that 135 and 
below, you are paying 100 percent of their premium?
    Ms. Washington. That is right.
    Mr. Burr. Then are they on a 50-50 share for every drug 
they buy then, or are you paying 100 percent of their drugs.
    Ms. Washington. We would also pick up the co-pay for those 
beneficiaries.
    Mr. Burr. You would also pick up the 50 percent co-pay. 
Now, above the 135, they are partially responsible for their 
premium, or you are going to subsidize their premium?
    Ms. Washington. They are partially responsible for it. We 
would partially subsidize their premium.
    Mr. Burr. And how about the co-pay, the 50 percent?
    Ms. Washington. No, they would----
    Mr. Burr. They would pick up the 50 percent?
    Ms. Washington. For that population, I think they would 
pick up the co-pay.
    Mr. Burr. Okay, so now you have picked up $302, and they 
are going to pay 50 cents of every dollar that they spend. Now, 
at what point does the partial subsidy of the premium stop, 
what income, what poverty level?
    Ms. Washington. That is at 150 percent of poverty.
    Mr. Burr. So at 150 percent, the individual is responsible 
for their premium and their co-pay?
    Ms. Washington. Right.
    Mr. Burr. Okay. Now, so these numbers would be accurate for 
somebody at 150 percent of poverty or above, where of $1,000 
worth of drug spending, the actual value of the plan is a 
negative $134. Let me remind you what 150 percent of poverty 
is. Mr. Waxman and I disagree. I have it at $11,727 on an 
annual basis. We are going to tell those people, we are going 
to offer them a product, that if they have $1,000 worth of drug 
costs in a year, they are going to pay $1,100 bucks for, and 
somebody has computed 80 percent of the seniors are going to 
buy into this?
    Ms. Washington. Well, you have to look at the quality of 
the coverage that most beneficiaries have now. A third of the 
beneficiaries have no----
    Mr. Burr. Clearly, under this scenario, they could pay for 
it and they would come out better.
    Mr. Scanlon. Mr. Burr, if I could add, I think that we need 
to really think about this as an insurance plan, and the issue 
is that if I knew with certainty that I was going to have 
$1,000 worth of coverage, then maybe I wouldn't buy this 
insurance plan. But if I have a different situation, which is 
that the only way I can get into this insurance plan which is 
subsidized at 50 percent is to opt for coverage now, and to be 
able to maintain that coverage for the future, and it is always 
50 percent subsidized, I may do that.
    The example I think that we need to look to is Part B, 
where the participation rate is well above 90 percent, and it 
is something where you have to opt into Part B when you first 
become eligible for Medicare.
    Mr. Burr. Or you----
    Mr. Scanlon. You don't wait until you discover what your 
health care costs are going to be.
    Mr. Burr. Let me ask you, from a GAO perspective, if we 
were to design a drug benefit that was open universally to all 
seniors, and there was value at the high end, let's say for a 
minute that the cost of the low end and the cost of the high 
end were the same, have you eliminated the adverse selection 
risk of the low end because you have got seniors to buy in on 
the high end?
    Mr. Scanlon. I think you have eliminated some of the 
adverse selection risk. I think the two biggest things that 
eliminate the adverse selection risk are the subsidy, which 
makes this of value to more people, and the fact that if you 
only have limited open enrollment periods, that people are 
going to sign up not knowing what the future is going to hold--
--
    Mr. Burr. So more mandatory than voluntary, is what you----
    Mr. Scanlon. Well, not mandatory. It is voluntary, but you 
are not----
    Mr. Burr. But creating a penalty is a form of a mandatory 
suggestion. Let me just ask you, because I know we are going to 
run out----
    Mr. Greenwood. The gentleman's time has expired.
    Mr. Burr. A last question, if I could. Could both of you 
just comment on your impression of the commission's report, 
which was premium support as it relates to Medicare, and in 
that they had a drug benefit, but would you just comment on 
whether HCFA is supportive and thinks that that model would 
work, and whether GAO has looked at it and whether they think 
that model would work.
    Ms. Washington?
    Ms. Washington. When the commission reported out its plan, 
the President expressed some serious concerns about the model. 
We have proposed our own plan, that includes injecting 
competition into the program and adding a prescription drug 
benefit, that we think would provide the right incentives to 
choose lower cost plans without increasing fee-for-service 
premiums for people who would like to stay in that program.
    Mr. Burr. But that is not the President's drug plan here.
    Ms. Washington. No. The President's drug plan is included 
as part of his comprehensive reform proposal.
    Mr. Burr. This proposal that is on the table now.
    Ms. Washington. The one we are talking about today.
    Mr. Burr. Dr. Scanlon?
    Mr. Scanlon. Mr. Burr, we are in the process of looking at 
both the premium support model and the President's plan, and 
the Comptroller General, David Walker, is going to be 
testifying on the 24th about the analysis that we have done, so 
I would defer until that date.
    Mr. Burr. I will wait anxiously for that.
    Mr. Greenwood. The gentleman's time has expired.
    We thank the panel for your forbearance and for your 
excellent testimony.
    We are going to call up the third panel, call up Ms. Lisa 
Alecxih, vice president of The Lewin Group; Dr. Bruce Vladeck, 
senior vice president of policy, Mount Sinai NYU Health; Mr. 
Don Moran, president, The Moran Company; Ms. Carol McCall, 
executive vice president, Managed Care and Clinical 
Informatics; and Dr. Don Young, chief operating officer.
    For the benefit of the next panel and the members and the 
audience, I understand that Dr. Vladeck has a time constraint. 
We would ask, without objection, that Dr. Vladeck have the 
opportunity to provide his testimony, and then we will break 
for the vote and come back for the testimony of the others.

    STATEMENTS OF BRUCE C. VLADECK, DIRECTOR, INSTITUTE FOR 
 MEDICARE PRACTICE, MOUNT SINAI SCHOOL OF MEDICINE, AND SENIOR 
 VICE PRESIDENT FOR POLICY, MOUNT SINAI NYU HEALTH; LISA MARIE 
 B. ALECXIH, VICE PRESIDENT, THE LEWIN GROUP; DONALD W. MORAN, 
 PRESIDENT, THE MORAN COMPANY; CAROL J. McCALL, EXECUTIVE VICE 
 PRESIDENT, MANAGED CARE, ALLSCRIPTS; AND DONALD YOUNG, CHIEF 
   OPERATING OFFICER AND MEDICAL DIRECTOR, HEALTH INSURANCE 
                     ASSOCIATION OF AMERICA

    Mr. Vladeck. Thank you very much, Mr. Chairman. I said in 
my written statement a number of very sincere things about my 
appreciation for the courtesy and kindness this committee 
always showed me, and once again I am grateful for it. When I 
appeared before you more regularly, I made a number of 
commitments to my family about I would no longer be missing 
important events, and that has created my schedule problem 
today, and I appreciate your indulgence.
    Consistent with that, I will summarize very, very briefly 
my testimony by making one general observation and then just 
five points that I think are germane to some of the discussion 
today.
    The general observation I would make is actually triggered 
in my mind by a comment that is part of Mr. Scanlon's written 
testimony, to the effect that over the last 5 years the 5-year 
projections of the Congressional Budget Office of GDP have been 
off by an average of 2.5 percent. I think some of the rhetoric 
that we got used to 5 years ago about the long term prospects 
of Medicare and the Medicare Trust Fund is simply no longer 
accurate. We haven't caught up with what the economy has done 
in the last three or 4 years, in the models used not only by 
CBO but by the administration estimators as well, and I think 
some of the talk about impending bankruptcy and so forth of the 
Trust Fund is simply no longer accurate.
    That is probably a discussion for another day, however, and 
specific to a drug benefit, let me just make five points very 
quickly.
    The first point, Mr. Greenwood, I believe the technical 
economic term is ``price discrimination against retail 
customers,'' but your point is general. It is not targeted at 
seniors. Nonetheless, if you look at who pays what for 
prescription drugs in the United States, then the half of 
seniors who today are paying retail prices for prescription 
drugs are not only paying more than their fellow Americans who 
participate in plans, but they are in effect subsidizing more 
affluent people all over the world who are paying lower drug 
prices with the same availability, in Western Europe, for 
example, and that obviously has to be part of the solution to 
the drug issue that emerges from this process.
    Second, if you look at what has happened to Medicare+Choice 
since the enactment of the Balanced Budget Act, I am 
increasingly convinced that it would be of enormous benefit to 
the continued growth of enrollment in captitated plans in the 
Medicare program to have a universal benefit that was available 
to everyone in the fee-for-service program. What we are 
finding, what the GAO and HCFA have reported is that HMOs, both 
because they believe it is necessary to managed care and 
because it is necessary to compete in the market, continue to 
offer drug benefits even though they have had to scale them 
back very dramatically, but that the cost increases they have 
experienced because of pharmaceuticals have had an adverse 
effect on their profitability and have contributed 
significantly to their departure from the program over the last 
several years.
    If you had the same benefit structure in both fee-for-
service and managed care, which was by the way not recommended 
by the nonreport of the Bipartisan Commission, then in fact the 
plans could compete on efficiency and customer service and 
quality and not be at risk for needing to attract beneficiaries 
by offering a benefit that the plans themselves can no longer 
afford to provide.
    Third, I know it is very popular in this city, I have been 
guilty of it myself, to talk about the virtues of targeting 
from an analytic point of view: Let's get the money where it is 
most needed, let's just make a benefit available to those who 
most need it.
    There has been a lot of discussion already today, I won't 
repeat, about problems of adverse selection in drug insurance 
plans, but I would also suggest to you that we have a lot of 
experience with efforts to target benefits to subsets of the 
Medicare population or to other folks, with which this 
committee is very familiar. As of today, barely half of the 
folks who are eligible for the QMB and SLMB program are 
enrolled in them.
    The problem with targeting is that it is very difficult to 
make it work, and it often fails to work. The difference in 
participating rates between, say, the QMB and SLMB program, or 
in Medicaid enrollment levels when it was tied automatically to 
an entitlement for cash assistance, as opposed to say 
enrollment levels in the CHIP program, suggests that you can 
expend a lot of money on administrative overhead and still 
reach only a fraction of the people you are ostensibly 
targeting; and that it is very difficult in a means-tested 
program to get to all the potential eligibles without enormous, 
enormous expenditures.
    So the problem with targeting is that it is great if you 
hit your target, but we mostly don't, and that is--we have a 
lot of experience in that regard, and it raises real questions, 
particularly with a drug benefit.
    I do think the analogy with Part B, though, is highly 
relevant on the issue of folks who currently have coverage that 
might be superior to that as part of any plan that was adopted. 
As Part B now exists, people have a one-time election when they 
first become eligible. If they have an employer-provided 
benefit, the election is postponed until the date at which they 
lose the employer-provided coverage. If they elect after the 
initial enrollment period, they can still get the benefit, but 
they have to pay an actuarially determined penalty that 
reflects their potential risk effect on the actuarial pool from 
their delayed enrollment. It is a process that has been working 
very effectively for 30-some-odd years, and there is no reason 
why it couldn't be adopted again.
    The last thing I will say is that we had a lot of 
experience, as the chairman knows, on the Bipartisan Commission 
on the whole issue of just what a defined benefit is, and the 
world in which every employer and every PBM and every HMO has 
their own formulary and their own generic substitution policies 
and so forth. I think none of us want to be in the position 
where Medicare offers one set of benefits in one part of the 
country and another set of benefits in another part of the 
country.
    And, therefore, while I think it is very valuable to use 
the expertise of the private sector and private insurance plans 
in administering a drug benefit, I think important coverage 
issues which have to do with whether someone can get the same 
benefit in San Diego that they get in Maine can't be left to a 
highly decentralized process. I am not suggesting the executive 
branch should make those decisions unilaterally. There are a 
lot of mechanisms to get the wisdom and participation of the 
industry and the scientific community and consumers. But the 
notion that you would permit too much flexibility in just what 
the benefit meant from one part of the country to another, I 
think would be very dangerous and politically very risky over 
time.
    I see my red light is already on. I know you have been very 
indulgent already. I thank you for the opportunity.
    [The prepared statement of Bruce C. Vladeck follows:]
    Prepared Statement of Bruce C. Vladeck, Director, Institute for 
  Medicare Practice, Professor of Health Policy and Geriatrics, Mount 
                        Sinai School of Medicine
    Mr. Chairman, Mr. Dingell, Mr. Waxman, members of the Committee, 
it's a great personal as well as professional privilege to have the 
opportunity to appear before you today. In the two and a half years 
since I left the government, there's not very much that I've missed, 
but I was always treated with great courtesy and interest by members of 
this Committee of both parties, and so I'm pleased to have the 
opportunity to appear before you again. Professionally, it's especially 
nice to be able to discuss Medicare reform in an environment in which 
we can appropriately focus on reforming the program by improving its 
benefit structure and its services to its beneficiaries, rather than 
having to focus most of our energies on reducing expenditures. I must 
emphasize for the record, in addition, that I am appearing before you 
today as a private citizen, and that the views I will be expressing are 
my own, and not necessarily those of Mount Sinai NYU Health, the Mount 
Sinai School of Medicine, or any other organization.
    The combined effects of the Balanced Budget Act of 1997, on which 
we worked so hard together, improved program administration, and--
perhaps most importantly--the continued performance of the nation's 
economy at a level far above the expectations of any of the official 
forecasters have dramatically altered Medicare's short and long-term 
financial prospects. At the moment, it appears that program 
expenditures are growing less rapidly than program revenues, and the 
projected date of insolvency of the Hospital Insurance Trust Fund, 
which has already been extended fourteen years since the BBA was 
enacted, will undoubtedly be estimated to occur still further in the 
future when this year's Report of the Trustees is released. Moreover, 
the federal government's budget surplus is so large that we now have 
the opportunity to infuse literally tens of billions of dollars into 
the Trust Funds, as a significant down payment on the resources we will 
need to provide benefits as us baby boomers reach eligibility age over 
the next thirty years. Still lagging behind these changes, however, is 
the conventional wisdom about Medicare's long-run prospects: the last 
several years should have made it clear that the doom and gloom 
projections of the 1980s and early 1990s were grounded in shortsighted 
and ultimately inaccurate conceptions of the prospects for the American 
economy. Medicare today is in better financial health than it has been 
in some time, so we must concentrate on improving the health of its 
beneficiaries.
    Whatever one's view about the long-term economic prospects may be, 
it is clear that, in the short run, the most important agenda for 
Medicare reform is the program's archaic and inadequate benefit 
structure. I applaud this Committee for turning its attention to the 
most visible aspect of that inadequacy: the absence of coverage for 
outpatient prescription drugs within the basic Medicare benefit 
package. I hope that your deliberations today will be part of a process 
that produces enactment of a comprehensive prescription drug benefit 
before this year is out. In my remarks, I would like to make a few 
general observations about the problems in affording prescription drugs 
for Medicare beneficiaries, then identify four components that I think 
are essential in any new prescription benefit. I will conclude with 
some general observations about containing program costs.
The Need for a Prescription Drug Benefit
    I will not belabor what everyone already knows. Prescription drugs 
are an increasingly important part of modern medical practice, with 
recently-introduced pharmaceuticals holding the prospect for 
significant improvements in health and reductions in mortality, 
especially for the elderly. In conjunction with the increased 
importance of prescription drugs have come rapid increases in both 
their prices and utilization. Increasing numbers of Medicare 
beneficiaries are experiencing difficulty in affording the drugs their 
doctors prescribe for them; the response to affordability problems of 
forgoing prescriptions, or taking less than recommended doses, is 
increasingly reported, as are instances in which elderly patients are 
hospitalized or receive other, expensive treatments for problems caused 
by their inability to afford prescriptions. As a proportion of total 
income, Medicare beneficiaries now spend almost as much on out-of-
pocket prescription drugs as the average non-elderly family spends on 
all out-of-pocket medical expenses. But I would like to emphasize three 
aspects of this problem that generally receive somewhat less attention.
    First, the way in which the prescription drug market has evolved 
means that roughly 20 million Medicare beneficiaries (those without any 
prescription drug coverage, those with coverage through individual 
Medigap policies, and some of those with employer-provided policies) 
are essentially the only large group of insured Americans paying retail 
list prices for their prescriptions. As other purchasers, such as 
private insurers or hospital group purchasing organizations, seek ever-
larger discounts from manufacturers or wholesalers, increased costs are 
passed on to that part of the population most dependent on prescription 
drugs, and least able to afford them. Given the price differentials in 
prescription drugs between the United States and other industrialized 
countries, that means, in effect, that those 20 million Medicare 
beneficiaries are subsidizing prescription costs for younger and more 
affluent people throughout the Western world. Any Medicare drug benefit 
that fails to remedy this unfairness will be inadequate and excessively 
expensive.
    Second, prescription drug coverage offered on a voluntary basis is 
especially vulnerable to adverse risk selection. The results are 
apparent both in the market for those Medigap plans that cover 
prescriptions and in the experience of state-financed prescription 
plans for low-income Medicare beneficiaries. While all older people are 
at risk for high prescription costs, a significant fraction of Medicare 
beneficiaries with the greatest need for prescription drugs require 
expensive maintenance doses for chronic conditions. As the prices of 
drugs and insurance both increase, insurance premiums are thus a good 
buy for only a diminishing fraction of beneficiaries with the highest 
costs, thus further driving up premiums in a classic insurance-
selection ``death spiral.''
    Third, and perhaps least obviously, I personally believe that 
guaranteed prescription drug benefits for all Medicare beneficiaries 
may be essential to the long-run prospects of Medicare+Choice plans. 
Since the enactment of the Balanced Budget Act, most managed care plans 
participating in Medicare have apparently concluded that offering some 
kind of prescription benefit is essential both to their ability to 
attract enrollees and to their ability to effectively manage their 
care. Yet simultaneously, increases in prescription drug costs are 
having a significantly adverse effect on the profitability of plans, 
causing many of them to reduce or discontinue their participation in 
Medicare. Inclusion of a prescription drug benefit in the basic 
Medicare benefit package would permit us to determine payment for fee-
for-service and Medicare+Choice on the same basis, move forward with 
more sophisticated risk adjustment, and make relative efficiency and 
customer satisfaction the basis for competition between plans and 
``traditional'' Medicare. At the same time, in response to the 
pressures of rapidly-rising drug costs, Medicare+Choice plans have 
adopted a bewildering variety of formulary restrictions, benefit caps, 
and other techniques to try to manage their pharmaceutical costs, most 
of which are perfectly reasonable in themselves, but which 
significantly complicate the process of choice for beneficiaries. 
Adoption of a standard Medicare pharmaceutical benefit would 
significantly simplify the choice process.
Essential Components of a Medicare Prescription Benefit
     1. UNIVERSALITY: First, any Medicare prescription drug 
benefit should be universal--that is, it should, at a minimum, be 
available to all beneficiaries in conjunction with their initial 
Medicare enrollment, and for all current beneficiaries when the new 
benefit first becomes available. There are at least three reasons for 
this. The problem of adverse selection in any more limited drug-only 
insurance program has already been noted. The way to prevent or combat 
it is to combine universal availability of the benefit, enrollment 
procedures that are easy but available only under specified conditions, 
and subsidy levels adequate to insure that the benefit is a good deal 
even for those beneficiaries who do not anticipate high drug 
utilization. Further, as members of this Committee well know, our 
experience with the Qualified Medicare Beneficiary and Supplemental 
Low-Income Medicare Beneficiary programs demonstrate that efforts to 
enroll Medicare beneficiaries on an ad hoc basis for needed additional 
benefits are likely to be cumbersome and ineffective--and likely to 
fail to reach a large fraction of those most in need. Policy wonks love 
to expound on the virtues of ``targeting'' benefits to some subset of 
the population with particular needs. That's a fine idea in theory, but 
actual programs too often misfire. And we always run the risk of 
spending as much money on administration and outreach as we save by 
delimiting the pool of eligibles. Most fundamentally, the universality 
of Medicare as a social insurance program is one of its greatest 
operational as well as political strengths. Beneficiaries know that 
they have contributed to the program throughout their working lives, 
and continue to contribute in retirement. To deny an additional benefit 
to a contributor who fails by some slim margin to meet some arbitrary 
cutoff or eligibility standard is neither fair nor practical.
    I know that many participants in the policy process have expressed 
concern that a universal Medicare drug benefit might actually prove to 
be an inferior or more expensive alternative for many of the 30% or so 
of current beneficiaries who have prescription drug coverage through an 
employment-related retirement benefit, and I see no reason why 
beneficiaries shouldn't be permitted to opt out of a new drug benefit, 
just as they all have the option of declining Part B coverage. Indeed, 
it makes sense to extend the Part B analogy still further: 
beneficiaries should have an initial election period to accept or 
decline prescription coverage; if they decline because they are covered 
by an employment-related plan, they should be permitted a new election 
period should that plan be discontinued; otherwise, delayed election 
should result in an actuarially-increased premium.
     2. ADEQUACY: It would be a tragedy for this or any other 
Congress to struggle to enact a prescription drug benefit for Medicare 
beneficiaries that turned out to be inadequate to beneficiaries' needs. 
It's essential that any prescription benefit be designed and 
administered in a fiscally prudent way, but it's also essential that 
the benefit be worthy of its name. That means that it must provide at 
least some assistance for the great majority of beneficiaries with 
prescription expenses of as little as several hundred dollars a year--
since such ``little'' amounts, if unexpected and unbudgeted, can have 
large impacts for people scraping by on fixed incomes--while providing 
more comprehensive protection against catastrophic expenses. In fact, 
for Medicare beneficiaries the problem of affording prescription drugs 
is really three problems in one. To borrow from medical terminology, 
there are beneficiaries with sudden, acute drug expenses, beneficiaries 
with significant chronic expenses, and beneficiaries confronted with 
total financial disaster as a result of prescription drug expenses. A 
new drug benefit must address all three types of problems.
     3. UNIFORMITY: One of the cardinal principles of Medicare 
is that it provides the same benefits everywhere throughout this 
diverse and heterogeneous country. One of the lessons many of us 
learned in the deliberations of the National Bipartisan Commission on 
the Future of Medicare is just how complex maintaining and insuring a 
defined benefit can be. This problem is especially important in the 
context of a prescription drug benefit, since in response to cost 
pressures, insurers, employers, and health plans have developed an 
extraordinary array of techniques for limiting formularies, encouraging 
or requiring certain substitution practices, or delaying coverage for 
newly-introduced products. But to permit too much variation or 
decentralization in this kind of decision-making for a Medicare drug 
benefit would create the very real risk of situations in which 
beneficiaries living in different parts of the country with identical 
medical conditions and identical physician decisions about optimal care 
would receive significantly different benefits. Medicare beneficiaries 
who need transplants are eligible for them under the same conditions 
and limitations whether they're in Seattle or Miami. They should be 
able to get the same drugs, when prescribed by their doctors.
    Precisely because administration of a drug benefit is complex and 
affected by rapidly changing scientific and market conditions, the 
Congress probably would not want to legislate the details of a drug 
benefit with the degree of specificity necessary for administration. 
Rules for generic substitution for brand-name drugs should probably 
vary from one drug category to another, for example, and vary over time 
as well, as products enter and leave the market. It's probably 
desirable, therefore, to construct some kind of broadly-based of 
advisory structure or process to assist the Congress and the Executive 
Branch in making such decisions. This would permit an effective 
combination of broad-based participation by stakeholders in 
programmatic policy with efficient implementation of those policies. 
But there must be such a process--open, participatory, and explicit--if 
beneficiaries in different parts of the country are to be treated 
equitably.
     4. ADMINISTRABILITY: Providing an adequate Medicare drug 
benefit in a fiscally prudent manner is a significant challenge in 
itself; it would be unwise to exacerbate that difficulty by imposing a 
separate, complex, administrative structure on a single benefit. Given 
the economies of scale available from existing electronic billing and 
remittance technologies for pharmaceuticals, and the demonstrated 
quality advantages of utilizing automated prospective utilization 
review software, it should be possible to maintain the level of 
exceedingly low administrative costs that now prevails for other 
Medicare fee-for-service benefits by building on existing private-
sector capabilities for benefits administration. At the same time, 
however, it would be wasteful and foolish to create new enrollment, 
premium collection, or beneficiary communications processes when the 
current ones work so unobtrusively and so inexpensively.
Containing Costs of a Prescription Drug Benefit in Medicare
    Even at this relatively prosperous juncture in the nation's and 
Medicare's economic history, it is obviously essential to take every 
possible step to ensure that a Medicare prescription drug benefit is 
implemented as economically as possible. Prescription drugs are 
expensive; that's why a drug benefit is needed in the first place, and 
a new benefit will be expensive. But it's critical that it not be any 
more expensive than is absolutely necessary.
    There are essentially three dimensions to a strategy of controlling 
the cost of a prescription benefit. The first is to require some degree 
of beneficiary cost-sharing for first-dollar expenditures, as all the 
legislative proposals now before the Congress do. The second, as 
discussed above, is to employ the most effective available utilization 
management techniques on a uniform and equitable basis. But as I 
mentioned at the outset of this statement, it is also necessary to 
recognize that the pricing of prescription drugs for most Americans is 
already determined not by some reproducible, abstract, formula, but 
through a continuing process of multidimensional marketplace 
relationships. Some method must be found to arrive at prices in a 
Medicare drug benefit that are equitable to taxpayers, beneficiaries, 
retailers, and manufacturers alike.
    The most economical approach, from the perspective of taxpayers and 
beneficiaries, would be to simply let the federal government negotiate 
prices directly with manufacturers, but I understand the uneasiness 
with which many analysts and commentators, not to mention the 
pharmaceutical industry itself, views this option. There have thus 
emerged all sorts of proposals to delegate the price-negotiation 
process to private intermediaries of one sort or another, through 
contracting with pharmacy benefits management firms or other entities 
with experience in negotiation of pharmaceutical prices. To the extent 
that such negotiations are indeed on pricing, within the context of 
nationally-uniform policies on coverage, substitution, and formularies, 
if any, I suspect that's a reasonable approach, although I would be 
apprehensive about any sort of fixed-price arrangement that provided 
the intermediaries with too great a financial incentive to maximize 
profitability at the expense of beneficiary coverage or convenience.
    To make such a system work, over time, would require the 
availability of cost, price, and use data to both Congress and the 
Executive Branch that should be easy for private firms already in the 
business to provide, but that is not now generally available within the 
pharmaceutical industry. The old Progressive maxim that sunlight is the 
best disinfectant when the expenditure of public funds is involved 
should apply here with particular relevance, and should be central to 
any administrative arrangements the Congress adopts.
Conclusions
    In summary, I would urge the Congress to move expeditiously to 
enact a prescription drug benefit for Medicare beneficiaries that is 
universal, adequate in coverage, uniform throughout the United States, 
and simple to administer. Doing so will be expensive, but there are 
ways to insure that costs are minimized aggressively, and failing to 
act will make certain that thousands of this nation's most vulnerable 
seniors are unable to obtain the medications they need to maintain or 
restore their health--or forced to obtain them by foregoing other, 
essential expenditures. This problem will only get worse over time. The 
sooner the Congress acts, the sooner all Medicare beneficiaries will be 
relieved of the anxiety of being unable to afford medications they know 
can benefit them.
    It has been, again, an honor and a privilege to have the 
opportunity to appear before you today. I'd be happy to try to respond 
to any questions you might have.
    Thank you very much.

    Mr. Greenwood. Thank you, Dr. Vladeck. I must ask the 
indulgence of the rest of the panel, and they have been waiting 
all day. We have just 5 minutes left in this vote. I am 
informed that there will 10 minutes of debate followed by 
another vote, so we will be at least 20 minutes and perhaps 25 
minutes until we return.
    Dr. Vladeck, we would love to ask you questions, but if 
your schedule doesn't permit that, we will understand.
    Mr. Waxman. Mr. Chairman, may we leave the record open and 
ask him some questions in writing?
    Mr. Vladeck. If you have written questions and would like 
me to respond to them, I will do so right away.
    Mr. Greenwood. Certainly. Without objection. So this 
hearing will recess until 2:20.
    [Brief recess.]
    Mr. Bilirakis. Okay. I think we all have been introduced, 
have we not? Ms. Alecxih, is that correct?
    Ms. Alecxih. That is right.
    Mr. Bilirakis. Vice President of The Lewin Group. Please 
proceed. Your opening statement, your written statements, of 
course, are made a part of the record.

               STATEMENT OF LISA MARIE B. ALECXIH

    Ms. Alecxih. Basically, I was asked to discuss issues of 
fact, primarily in terms of coverage, prescription drug 
coverage among Medicare beneficiaries, and I guess the key 
points to be made are that nearly 70 percent of Medicare 
beneficiaries have some prescription drug coverage. It was 
mentioned earlier that there is some portion of those that 
don't have the entire period of the year, but a fairly large 
proportion, most of those with coverage obtained it from 
employer-sponsored plans, and nearly equal percentages get it 
from Medicaid, Medicare HMOs, Medigap, and some similar 
percentage switch what their source of coverage is during the 
year.
    Those with Medicare HMO coverage and employer-sponsored 
coverage are most likely to have prescription drug coverage. I 
said groups of those with Medicare HMO coverage, about 94 
percent of them have prescription drug coverage, and those with 
employer-sponsored coverage, about 89 percent of those have it. 
And those with Medigap are least likely to have coverage, about 
42 percent.
    These are all data based on the Medicare Beneficiary Search 
or Survey, which is a nationally representative survey of 
Medicare beneficiaries. That 42 percent for Medigap enrollees 
is probably high. Country-wide, the National Association of 
Insurance Commissioners data, where it does report 
policyholders by the type of policy, say standardized Medigap 
plans, and that is only 15 to 20 percent of those have by that 
measure an H,I, or a J plan for prescription drugs they chose. 
So it is not clear whether Medicare is accurate or not.
    The level of prescription drug benefits that is provided by 
these different sources of coverage varies. Medicaid and 
employer-sponsored tend to have the most generous benefits with 
low co-pays, and on the employer-sponsored side there are low 
deductibles, either an out-of-pocket limit or a lifetime limit, 
where Medigap has a fairly high co-pay requirement with a $250 
deductible in their co-pay and plan limits of $1.250 or $3,000.
    Each of them limit access to that coverage in some way. 
Employer-sponsored, obviously you have to have worked for an 
employer that offers this retiree coverage. That is generally 
larger employers. Medicaid, you have to be low income; Medigap, 
beyond the 6-month enrollment period when you become Part B 
eligible, there are almost always health status questions that 
you have to pass in order to be able to gain that coverage. And 
Medicare HMO, you are trading off freedom of choice among 
providers, and there is some geographic variation in the types 
and the level of benefit that is offered.
    Among the 31 percent of Medicare beneficiaries without 
prescription drug coverage, if you look at the sheer numbers, 
most of them are younger and have higher incomes. But if you 
look at the proportion within a group, the oldest old are least 
likely to have prescription drug coverage, and those actually 
in the middle and moderate income groups are the least likely 
to have prescription drug coverage.
    And if you look at the trend in prescription drug coverage 
over the 1992 to 1996 period, it has increased pretty 
dramatically based on the MCBS data. It has gone from 54 
percent to 69 percent, but it is unclear whether or not this 
will continue into the future or actually decline, because of 
payment changes to Medicare HMOs and whether or not those plans 
will be able to continue to offer drug benefits. We do know 
that they have limited the level of drug benefits between 1999 
and 2000, but not really in terms of the percent of plans 
offering benefits. It is about the same. And also the role of 
employer-sponsored coverage in the future, particularly for 
future retirees. Current retirees look pretty safe. It is the 
ones who in a decade it is not clear what that source will--
what role that will play among the Medicare beneficiaries.
    [The prepared statement of Lisa Marie B. Alecxih follows:]
Prepared Statement of Lisa Maria B. Alecxih, Vice President, The Lewin 
                                 Group
    I am going to discuss what we currently know about coverage and 
spending for outpatient prescription drugs among Medicare 
beneficiaries. Most of the data presented are from the 1996 Medicare 
Current Beneficiary Survey (MCBS). This survey provides the most 
comprehensive information about the characteristics and health care use 
and spending among a representative sample of Medicare beneficiaries. 
In addition to the MCBS: some of the Medicare HMO data were obtained 
from the HCFA-sponsored medicare.gov website which includes Medicare 
Compare, a database of relevant benefit coverage and levels for each 
Medicare HMO; some of the employer-sponsored health plan data were 
obtained from the 1997 Bureau of Labor Statistics (BLS) Employee 
Benefits Survey for Medium and Large Establishments found at bls.gov; 
and some of the private, individually purchased Medicare Supplemental 
insurance information (Medigap) were based on tabulations of National 
Association for Insurance Commissioners (NAIC) experience reporting 
forms for 1998.
    Exhibit 1 shows that approximately 69 percent of the 37.3 million 
Medicare beneficiaries in 1996 had prescription drug coverage at some 
point during the year.
    Because Medicare generally does not cover outpatient prescription 
drugs, Medicare beneficiaries that most of those with coverage obtain 
it from a former employer. Medigap, Medicaid and Medicare HMOs 
accounted for between 12 and 15 percent each of those with prescription 
who did have coverage obtained it from a variety of private and public 
sources. Exhibit 2 indicates drug coverage. Individuals who changed 
their primary supplemental insurance choice at some point during the 
year (switched sources) also constituted 12 percent of those with 
prescription drug coverage. A small percentage (two percent) reported 
relying on other public sources, such as the Veterans Administration 
and state-sponsored programs.
    Within supplemental insurance group, those enrolled in Medicare 
HMOs had the highest percentage with prescription drug coverage, 
followed by employer-sponsored (see Exhibit 3). Not all individuals 
with Medicaid coverage had drug coverage because many receive 
assistance with Medicare Part B premiums and copayments through the 
Medicaid Buy-In programs (QMB, SLMB and QI), but do not qualify for the 
full range of benefits offered by a state. Those purchasing Medigap 
coverage were the least likely to have prescription drug coverage. The 
estimate of the percent of Medigap purchasers with prescription drug 
coverage may be overstated. Data from the National Association of 
Insurance Commissioners indicate that between 15 and 20 percent of 
those with Medigap standardized plans purchase those with drug coverage 
(H, I, and J).
    The level of prescription drug benefits varies among the sources of 
coverage:

 Employer--Slightly over one-half of employer-sponsored plans 
        in medium and large establishments have their prescription drug 
        benefits subject to the major medical limits of the plan. 
        According to BLS data, in 1997, the average deductible was 
        $268, the average annual out-of-pocket expense limit was 
        $1,578, and the average lifetime maximum was $1.1 million. 
        Among plans that had specific copayments for prescription 
        drugs, these were generally $10 or less.
 Medigap--Among the ten standardized plans, H, I and J offer 
        prescription drug coverage with a $250 deductible, 50 percent 
        coinsurance, and plan limits of $1,250 or $3,000.
 Medicare HMO (Medicare+Choice)--Most Medicare+Choice plans 
        have plan limits of $2,000 or less and copayments that vary for 
        generic and brand drugs, but are generally $10 to $25. Although 
        most plans have limits, more beneficiaries actually enroll in 
        plans with no limits or more generous limits than $2,000.
 Medicaid--Medicare beneficiaries who qualify for full Medicaid 
        benefits generally have unlimited coverage for prescription 
        drugs. Some states use formularies, while others require 
        nominal copayments.
    Each of the primary existing sources of prescription drug coverage 
limit access to coverage, either through employment requirements, 
underwriting or eligibility criteria.
 Employer--Individuals must have worked for a generally large 
        employer that provides retiree coverage in order to have access 
        to this coverage source.
 Medigap--After the six month initial open enrollment period 
        for Part B, insurers check health status prior to issuing 
        policies (underwrite), which means those most in need of 
        prescription drug coverage would not be able to obtain it. In 
        addition, the premiums for these policies can be expensive.
 Medicare HMO--Individuals choosing to enroll in Medicare HMOs 
        trade-off choice of providers for extra benefits. Also, due to 
        Medicare payment policies, there availability of prescription 
        drug coverage without an extra premium and level of benefits 
        vary geographically.
 Medicaid--This program is restricted to low income 
        beneficiaries.
    Among those without prescription drug coverage, these individuals 
tend to be younger and have higher income (see Exhibit 4 and 5). The 
younger elderly constitute a large percentage because they make up the 
largest group of Medicare beneficiaries. However, the oldest old 
actually have a higher rate of individuals without prescription drug 
coverage (see Exhibit 6). The same is true among the income groups, 
where more individual without coverage have higher income levels, but 
the rate of those without coverage is highest among those with lower 
incomes.
    Medicare beneficiaries who do not have prescription drug coverage 
spend less on average for their total prescription drug bill, but pay 
more out-of-pocket (see Exhibit 7). These individuals spend less 
primarily because they lack coverage.
    Between 1992 and 1996, the percentage of Medicare beneficiaries 
with prescription drug coverage increased from 54 percent to 69 percent 
(see Exhibit 8). Much of the increase was the result of increased 
enrollment in Medicare HMOs. Part of the increase appears to be due to 
increasing rates of coverage within the primary sources of coverage, 
which may be the result of individuals seeking out coverage in response 
to rising prescription drug costs.
    In the future, coverage rates may be less likely to increase 
because: 1) Medicare HMOs may need to respond to further payment 
restrictions that may limit their ability to offer zero premium drug 
coverage and limit their appeal to beneficiaries; and 2) employers are 
cutting back on health benefits for future retirees.
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    Mr. Bilirakis. Let's see. Mr. Moran? I skipped over to you. 
I have you all listed in my notes in a different order.

                  STATEMENT OF DONALD W. MORAN

    Mr. Moran. Thank you, Mr. Chairman. It is a pleasure to 
have an opportunity to appear before you all today. Mr. Ganske, 
a pleasure, as well.
    My assignment today, as I understand it, is to concentrate 
on some of the technical design issues involved in building a 
Medicare drug benefit, with a particular attempt to address the 
question of whether or not it is technically feasible and 
affordable to put stop-loss coverage in as part of the package. 
And so I just wanted to briefly set the stage for that, 
summarize 5 or 6 points that I think we have learned about that 
in looking at it in some depth over the last year or so, and 
then be available with the rest of the panel to answer whatever 
questions you have.
    The stop-loss issue arises because of the intersection 
between two forces that you have had ably described before you 
this morning. On the one hand there is a growing concern about 
the cost of prescription drug benefits, which means that even 
those who have them are beginning to see an increasing 
application of coverage limits placed on those policies.
    At the same time we have also seen, I think less fully 
discussed this morning, some sharp uptake which soon become a 
tidal wave of very high cost new therapeutic products coming 
onto the market. In the past we have considered a high drug 
cost to be products that had an annual cost in the range of 
$1,000 or $2,000. We are about to enter an era where $5,000, 
$10,000, $15,000 and $20,000 products that offer major new 
therapeutic advantages at a substantial price tag will be 
rolling into the system, and one of the things that you engage 
in the stop-loss debate is the extent to which even people of 
middle and upper incomes will have the coverage adequate to 
cover those kind of expenditures.
    So it is in that context, Mr. Chairman, that there has been 
natural concern from a number of quarters. As a result, in our 
work over the last year and a half we have made a concentrated 
effort to look into the technical design issues, and I think we 
can summarize very succinctly what we think the major issues 
are.
    First, the cost of putting stop-loss into a benefit package 
ranges from pennies a day to large quantities of money, 
depending on exactly where you set it. I think it is fair to 
say that if you were to concentrate a stop-loss benefit focused 
on the very highest cost drugs and the upper end of the 
distribution, it might be surprisingly affordable, and that in 
fact the total number of Medicare beneficiaries who today 
probably have expenditures in excess of $5,000 or $10,000, say, 
would add up to a de minimis pile of money from the perspective 
of the Trust Funds as a whole.
    Conversely, if you bring that down well into the--
distribution of actual drug expenditures say down to the level 
of $1,000, then obviously a stop-loss benefit gets very 
expensive quite quickly and gets progressively more expensive 
over time. So part of the art of this is understanding what 
your policy objective is, which target population you really 
want to go after, and then fashioning a benefit that does that.
    Second, I think it is important to say that the cost of a 
stop-loss benefit is highly sensitive to the quality of the 
front end coverage that people have. By front end coverage I 
mean the basic coverage that people have for after dollar 
deductible and whatever co-payments to cover the first $1,000 
or $2,000 of pharmaceutical expenditures. It is fair to say 
that the better that coverage is, the less quickly people will 
reach whatever stop-loss limit is in application, and the less 
they will be spending in excess of that. So the more you marry 
stop-loss coverage with high quality front end coverage, the 
more affordable it is likely to be.
    A third point which I think is a corollary of that, Mr. 
Chairman, is that you have to be very careful in your 
evaluation of proposals that call for just catastrophic-only 
types of benefits. The reason is, depending on where you might 
set the stop-loss limit on such a benefit, that such a benefit 
would have the potential to induce people to drop their 
existing coverage in favor of that limit. And so you have to be 
very careful to make sure that either you marry a stop-loss 
provision to a front end coverage package, or else place the 
catastrophic threshold high enough so it is not an inducement 
for people to drop.
    Fourth, and I think this is echoed in a couple of the 
things a variety of people said throughout the day today, 
integrating administration of a stop-loss benefit with whatever 
the front end benefit is is very important. To have a situation 
where beneficiaries would have to be saving up receipts in 
shoeboxes on one hand, to trundle across town to plunk down to 
prove eligibility for another benefit, strikes most people in 
the industry as sort of antediluvian at this point. What you 
really want is integrated benefits administration from front to 
back, with stop-loss coverage provided by whoever the front end 
insurer is.
    Fifth, and this has been referenced a number of times by 
folks during the course of the day today, is that in a 
voluntary market obviously the character of participation is 
going to matter in terms of whether not you have significant 
selection effects, though I would say that, again, if you were 
targeting a stop-loss benefit higher up into the cost 
distribution, you would have much less of a selection problem.
    Finally, seeing my red light and being ready to summarize, 
I think I will hit my sixth point, just to say that I think the 
one thing we all understand about a drug benefit that would 
focus the benefit on a high cost case or the highest cost 
cases, it will subject whatever drug expenditures make up that 
pot of money to substantial scrutiny, and it is going to be 
very important to understanding that if you go in the direction 
of a stop-loss benefit, to have a policy that satisfies your 
policy objectives, to make sure that you can fit that in some 
way that all parties will consider to be meaningful and real.
    Thank you very much.
    [The prepared statement of Donald W. Moran follows:]
  Prepared Statement of Donald W. Moran, President, The Moran Company
    Mr. Chairman: I am Donald W. Moran, President of The Moran Company, 
a multi-disciplinary health care research and consulting firm based in 
Fairfax, Virginia. While my firm provides services to businesses and 
associations with an interest in the matters that are the subject of 
your hearings, my purpose in appearing before the Subcommittee today is 
not to advocate any particular position on the question of whether and 
how a prescription drug benefit might be added to the Medicare program. 
Rather, I have been requested to address some of the important program 
design questions with which this Subcommittee must wrestle in order to 
arrive at a workable design. I will focus particularly on the issue of 
whether so-called ``stop loss'' coverage represents a feasible and 
affordable option in any drug benefit design the Subcommittee might 
consider.
    The issue of stop loss coverage arises in this debate because of 
the increasingly high cost of many important pharmaceutical and 
biologic therapies that are now emerging as a result of rapid 
innovation in the industry. While these products represent important 
improvements to the health care system's ability to treat--and even 
cure--disease, the intensive research and development costs of 
producing them means that they come to market at substantial price 
tags.
    It is important to understand that the cost to patients is not 
simply the result of the high unit prices some of these products bear. 
Since the benefit of many of these products flows from their ability to 
help physician and their patients manage chronic disease over a 
sustained period of time, an equally important determinant of the cost 
to patients is the cumulative cost of maintaining patients on these 
therapies. Annual maintenance costs in the thousands of dollars--or 
even tens of thousands of dollars--are becoming increasingly common. 
This trend raises natural questions about Medicare beneficiaries' 
ability to access these drugs at an affordable cost.
    As pharmaceutical therapy becomes an increasingly important part of 
the health care system, we can expect a continued rise in the cost of 
providing benefits for prescription drugs relative to the cost of other 
health benefits. Although we can expect offsetting benefits from this 
shift in therapeutic emphasis down the road, the immediate impact is a 
sharp rise in the trend rate of growth for pharmaceutical expenditures 
under health benefits programs that cover drugs. Companies that provide 
drug benefits to both the working aged population and the elderly are 
responding to this rising trend in various. One increasingly common 
response, which this Subcommittee has undoubtedly observed in its 
oversight of the Medicare + Choice program, is a growing trend toward 
annual benefit limits on coverage for prescription drugs.
    Annual benefits limit, viewed from the vantage point of the health 
benefits market, have some desirable features. Since the great majority 
of health plan beneficiaries have annual expenditures less than the 
limits, imposing these caps allows insurers to provide essentially full 
benefits to the great majority of beneficiaries, at a price far lower 
than would be possible if the cost of the small number of highest cost 
users were included. The imposition of caps also partially isolates the 
insurance pool from the upward trend in drug costs. Imposing caps, 
however, has the unfortunate side effect of exposing a limited number 
of the highest prescription drug users to the full cost of the 
medications they need.
    Given these realities, the question arises whether a Medicare 
prescription benefit should provide ``stop loss'' protection for 
beneficiaries. As the term is commonly used, ``stop loss'' refers to a 
benefit design under which the beneficiary's out-of-pocket exposure for 
covered benefits is capped at a pre-specified level, after which the 
benefits program provides full benefits with no further coinsurance. 
This benefit design is, of course, the mirror image of an annual 
benefit limitation.
    Because of the skewed character of the distribution of drug 
benefits risk, the cost of providing such a benefit is acutely 
sensitive to where the ``stop loss limit'' is set relative to that 
underlying distribution--both initially, and over time. Using the most 
recent Medicare Current Beneficiary Survey data available from HCFA--
which is our only comprehensive source of information about drug 
spending and coverage among Medicare beneficiaries--my colleagues and I 
have conducted a detailed exploration of the fiscal and design 
implications of providing stop loss coverage for Medicare beneficiaries 
under various proposals now pending before the Congress. While we would 
be pleased to share our detailed findings on various points with the 
Committee at some later time, let me summarize the key lessons we have 
learned from this analysis:
    First, the cost of providing stop loss coverage directed at the 
highest-cost patients is surprisingly affordable. A policy directed at 
covering the limited number of Medicare beneficiaries whose annual 
spending on drugs exceeds, say, $10,000, would amount to less than $50 
million today, nationwide. As we come down the consumption scale toward 
lower levels, however, the costs begin to add up. By the time we get 
down to the level of, say, $1,000, the current cost of providing stop 
loss coverage could rise to over $10 billion annually.
    Second, the cost of stop loss coverage is highly sensitive to the 
quality of the ``front end'' coverage Medicare beneficiaries have. By 
``front end'' coverage, I mean their present private drug coverage, 
through either a retiree benefits program or Medigap. This conclusion 
is a logical one, since the better that front end coverage is, the 
longer it takes for a beneficiary to exceed whatever out-of-pocket 
spending cap is provided by the stop loss coverage--and the less 
spending there is to cover once they reach it.
    Third, for the reason just cited, the Subcommittee should be 
careful in its evaluation of proposals for ``catastrophic only'' drug 
benefits proposals. While benefits plans structured in this way may 
seem attractive for other policy reasons, they may have the effect of 
encouraging beneficiaries to drop their existing private coverage, 
converting the stop loss benefit into a high deductible unlimited 
coverage policy that would start paying benefits much faster than it 
would if their private coverage had been maintained.
    Fourth, there are some important advantages to integrating 
administration of a ``stop loss'' benefit with whatever ``front end'' 
coverage beneficiaries elect. Unitary administration would sharply 
reduce the administrative hassle of keeping track of spending by the 
beneficiary, and would ensure continuity of application of whatever 
benefits management techniques were employed by the primary insurer.
    Fifth, the cost of a stop loss benefit to the beneficiary in a 
voluntary market for private coverage will depend on the extent of 
participation, since a voluntary market may experience some degree of 
adverse selection. If low users were to disproportionately opt out of 
the system, the per beneficiary cost of providing stop loss would rise. 
It may be useful to note in passing, however, that the total cost of 
providing stop loss coverage through a private voluntary market would 
not be increased by adverse selection.
    Sixth, and finally, it is important to point out that a stop loss 
benefit, by its very nature, will invite scrutiny of the cost of the 
high end pharmaceutical products that would comprise the bulk of the 
spending under such a benefit program. Those concerned, as I am, about 
the motive toward price controls embedded in any Government-financed 
drug benefit program will want to evaluate this issue carefully. It 
would, I believe, be very important to craft a program with a 
regulatory and financing structure that insulated decision-making about 
product coverage and pricing from political control.
    Mr. Chairman, thank you for the opportunity to appear before the 
Subcommittee this morning to share the results of our work in this 
area. I would welcome the opportunity to answer whatever questions you 
or your members may have.

    Mr. Bilirakis. Thank you, sir.
    Ms. McCall?

                  STATEMENT OF CAROL J. McCALL

    Ms. McCall. Good afternoon. I would like to thank the 
chairman and the other remaining members of the subcommittee 
for bearing with us. I am very thankful for the opportunity to 
be here.
    My name is Carol McCall, and I am very recently the new 
executive vice president of managed care for Allscripts, but 
prior to this role, which again is very recent, as recently as 
last Friday I was vice president of pharmacy management for 
Humana, which is a managed care organization that provides 
pharmacy coverage for approximately 450,000 seniors through a 
Medicare+Choice program.
    I am a fellow of the Society of Actuaries and a member of 
the American Academy of Actuaries, and I also serve as a member 
of the Academy's Medicare Reform Task Force that is studying a 
number of issues involving proposed changes to Medicare. Among 
these changes under study by the Academy are the issues 
associated with adding a prescription drug benefit to the 
current Medicare coverage. I would like to note that although I 
am a member of the American Academy of Actuaries' Medicare 
Reform Task Force, I am testifying today in my private capacity 
and not on behalf of the Academy, whose analysis will discuss 
these issues in more depth.
    I would like to outline some of the issues that should be 
considered when designing a prescription drug benefit provided 
through insurance mechanisms. However, I would like to first 
emphasize one very important factor, which is that prescription 
drug coverage should not be added to Medicare in the absence of 
overall reform to the financing structure of the Medicare 
program.
    As you are aware, the trustees of the Medicare Trust Funds 
have indicated that expenditures from the HI Trust Fund, 
Medicare Part A, are expected to equal income into the fund as 
early as 2006, and costs are projected to exceed income after 
that point. In fact, if income earned from interest on the 
assets in the Trust Fund is excluded, the fund currently pays 
out more in claims than it receives from payroll taxes and 
premiums paid by beneficiaries.
    The Medicare Part B fund, which is financed primarily by 
general tax revenues, faces increasing financial pressure due 
to rising health care costs and a growing population of 
beneficiaries over the next decade. So adding a prescription 
drug benefit to either of these programs right now will only 
exacerbate the financial problems confronting Medicare, without 
the consideration of more broad reform.
    Specifically to the drug benefit itself, there are certain 
considerations that should be kept in mind when designing a 
prescription drug benefit, and there are two broad categories 
that I am going to touch on briefly and then we can, if there 
are any questions, we can talk about those: First, the category 
of benefit design in particular; and then, second, overall 
program design and issues.
    First, with respect to benefit design, is what drugs will 
be covered, and is it intended that all drugs will be covered 
by a plan or only those prescriptions most utilized by seniors? 
Will so-called lifestyle drugs be covered? And who will 
determine which prescriptions are included or excluded from 
coverage? To what extent will experimental treatments be 
provided? Each of these issues can have a major impact on the 
cost of the benefit.
    And second is how will the benefit be managed? Most plans 
offering a drug benefit use some sort of utilization and cost 
containment mechanisms, and these mechanisms are designed to 
make sure the drugs prescribed are appropriate for the 
particular medical condition of the patient. One consideration 
in providing a drug benefit through Medicare is the extent to 
which utilization management will be allowed both in the 
Medicare fee-for-service and in Medicare+Choice health plans on 
an ongoing basis.
    Third, the question of how will beneficiary cost-sharing be 
structured. A very important part of a health benefit design is 
how much and the manner in which participants are asked to pay 
a portion of out-of-pocket costs. If seniors pay for a portion 
of the cost, they are more likely to compare competing drug 
therapies, including any generic prescription drug options that 
are available. In addition, designing benefits where costs are 
shared, say through coinsurance, can impact the pricing 
strategies of pharmaceutical companies to the advantage of 
seniors.
    Fourth in benefit design is to consider what extent drug 
formularies will be permitted. Formularies are one mechanism 
that PBMs, insurance companies and managed care plans use to 
contain the cost of prescription drugs. There are a number of 
different ways in which formularies can be used, but all of 
them involve creating a list of preferred medicines whose costs 
are less than their therapeutic equivalents. The question is, 
will this mechanism for containing cost be allowed? And, if so, 
what is the method for choosing which drugs are going to be on 
a formulary? And can different plans have different 
formularies?
    For overall program design, it is important to consider to 
what extent will private health plans be involved in the 
program. As we have just heard, currently prescription drug 
coverage is available for seniors through employers who offer 
retiree coverage, to those who enroll in one of the Medicare 
supplement plans offering such benefits, and for those members 
of a Medicare+Choice health plan that provides drug benefits. 
You will need to consider the impact of the Medicare drug 
benefit on these programs.
    For example, will Medicare+Choice health plans be required 
to offer a benefit, for it is now an option. If a drug benefit 
is offered through Medicare, how will the Medicare supplement 
insurance plans currently providing drug benefits be treated? 
Will pharmacy benefit management companies, or PBMs, be used by 
Medicare to help administer a drug benefit for the 
beneficiaries? And what would be the role of PBM companies in 
this process? Would they serve only as administrators, or would 
they take some of the risk for their role they play in 
containing costs?
    It is important that we understand these dynamics and the 
answers to these questions, as it will impact overall program 
cost and quality.
    Finally, in closing, I would like to return to something I 
said at the start, which is, if Medicare is the vehicle chosen 
to provide prescription drug coverage for seniors, then 
Congress must act on the overall financial issues facing the 
Medicare program. It may be necessary to cut benefits, raise 
premiums, or increase contributions from the Federal budget in 
order to maintain the solvency of the Medicare Trust Funds. 
Adding an additional and potentially costly benefit to Medicare 
will place a further strain on the Medicare program. Congress 
should not let this opportunity pass without a serious 
discussion on how to deal with the long range financial 
solvency of Medicare.
    Thank you.
    [The prepared statement of Carol J. McCall follows:]
   Prepared Statement of Carol J. McCall, Executive Vice President, 
                        Managed Care, Allscripts
    Good morning Chairman Bilirakis and members of the Subcommittee. My 
name is Carol McCall and I am the Executive Vice President, Managed 
Care for Allscripts. Prior to this role, I served as Vice President, 
Pharmacy Management for Humana, Inc., a managed care organization that 
provides pharmacy coverage for approximately 450,000 seniors through 
the Medicare+Choice program. I am a fellow of the Society of Actuaries 
and a member of the American Academy of Actuaries. I also serve as a 
member of the Academy's Medicare Reform Task Force that is studying a 
number of issues involving proposed changes to Medicare. Among these 
changes under study is adding a prescription drug benefit to the 
current Medicare coverage. I appreciate the opportunity to appear 
before you today to testify regarding ways to provide seniors with 
coverage for prescription drugs. I would like to note that although I 
am a member of the American Academy of Actuaries' Medicare Reform Task 
Force, I am testifying today in my private capacity and not on behalf 
of the Academy.
    Prescription drug costs represent a significant part of health care 
expenses, and those costs have been rapidly rising over the past few 
years. The cost of prescription drugs can have a major impact on 
seniors, many of whom are on fixed incomes. Since Medicare is the 
primary source of health insurance coverage for seniors (almost 98 
percent of the population in this country age 65 years or older is 
covered by Medicare), one possible approach to this issue is to expand 
the current Medicare coverage to include some level of payment for 
prescription drugs.
    I would like to outline some of the issues that should be 
considered when designing a prescription drug benefit provided through 
an insurance mechanism. However, I would first like to emphasize one 
very important factor--prescription drug coverage should not be added 
to Medicare in the absence of overall reform to the financing structure 
of the Medicare program. As you are aware, the Trustees of the Medicare 
trust funds have indicated that expenditures from the Federal Hospital 
Insurance (HI) Trust Fund (Medicare Part A) are expected to equal 
income into the fund as early as 2006, and costs are projected to 
exceed income after that point. In fact, if income earned from interest 
on the assets in the HI trust fund is excluded, the fund currently pays 
out more in claims that it receives from payroll taxes and premiums 
paid by beneficiaries. The Supplementary Medical Insurance Trust Fund 
(Medicare Part B), which is financed primarily by general tax revenues, 
faces increasing financial pressure due to rising health care costs and 
a growing population of beneficiaries over the next decade. Adding a 
prescription drug benefit to either of these programs will only 
exacerbate the financial problems confronting Medicare.
    There are a number of health insurance plans today that provide 
prescription drug coverage for their members. There are practical 
considerations that should be kept in mind when designing a 
prescription drug benefit:

 Is providing a prescription drug benefit through Medicare the 
        best option?--Many of the current proposals start with the 
        assumption that the drug benefit will be delivered to seniors 
        through Medicare. Is this the most cost-effective way to help 
        seniors meet their medical needs? Do other options exist--such 
        as tax credits or using private insurance--that would work?
 How will a Medicare prescription drug benefit impact other 
        existing programs?--It is also important to evaluate the impact 
        of a Medicare prescription drug benefit on other payers for 
        medical care for seniors. Currently, three Medicare Supplement 
        insurance plans pay for drug coverage. In addition, some 
        employers offer retiree health benefits that include 
        prescription drug coverage and there are a limited number of 
        Medicare+Choice health plans with a prescription drug benefit. 
        You need to consider how a Medicare drug benefit will impact 
        those programs.
 What drugs will be covered?--Is it intended that all drugs 
        will be covered by the plan or only those prescriptions most 
        utilized by seniors? Will so-called ``life style'' drugs be 
        covered, and who gets to determine which prescriptions are 
        included or excluded from coverage? To what extent will 
        experimental treatments be provided? Each of these issues can 
        have a major impact on the cost of the benefit.
 How will the benefit be managed? Most plans offering a drug 
        benefit try to impose some form of utilization controls. These 
        utilization management strategies are designed to make sure the 
        drugs prescribed are appropriate for the particular medical 
        condition of the patient. One consideration in providing a drug 
        benefit through Medicare is the extent to which utilization 
        management will be allowed both in the Medicare fee-for-service 
        (FFS) program and in Medicare+Choice health plans.
 To what extent will private health plans be involved in the 
        program?--Currently, prescription drug coverage is available 
        for seniors who enroll in one of the Medicare Supplement plans 
        offering such benefits and for those members of a 
        Medicare+Choice health plan that provides drug benefits. Will 
        Medicare+Choice health plans be required to offer the benefit 
        (it is now an option)? If a drug benefit is offered through 
        Medicare, how will the three Medicare Supplement insurance 
        plans currently providing drug benefits be treated? Will 
        pharmacy benefit management companies (PBMs) be used by 
        Medicare FFS to help administer the prescription drug benefit 
        for their beneficiaries? What would be the role of pharmacy 
        benefit management companies in this process? Would they serve 
        as the administrators of the program or will they take some of 
        the risk for their role they play in containing costs?
 Will any of the cost of providing the prescription drug 
        coverage be subsidized?--There is some concern that Medicare 
        beneficiaries below a certain level of income will not be able 
        to afford a prescription drug benefit that is supported by 
        premium payments and/or co-payments and deductibles. What will 
        be the level of government subsidy for those enrollees and who 
        will qualify for that support? How will Medicaid eligible 
        seniors be covered?
 How will co-payments or deductibles be structured?--If you 
        have to pay for something, you will generally take more notice 
        of how much it costs. One important part of a health benefits 
        design is how much participants are required to pay ``out-of-
        pocket.'' If seniors pay for a portion of the cost, they may be 
        more likely to compare competing drug therapies, including any 
        generic prescription drug options.
 To what extent will drug formularies be permitted?--
        Formularies are one mechanism that PBMs, insurance companies 
        and managed care plans use to contain the cost of prescription 
        drugs. There are a number of different ways in which 
        formularies can be used, but all of them involve creating a 
        list of preferred medicines whose costs are less than their 
        therapeutic equivalents. Will this mechanism for containing 
        costs be allowed? If so, what will be the methods for choosing 
        which drugs are on a formulary? Can different options and plans 
        for providing coverage have different formularies?
    I would like to return to something I said at the start of my 
testimony regarding this issue. If Medicare is the vehicle chosen to 
provide prescription drug coverage for seniors, then Congress must act 
on the overall financial issues facing the Medicare program. It may be 
necessary to cut benefits, raise premiums or increase the contributions 
from the federal budget in order to maintain the solvency of the 
Medicare trust funds. Adding an additional (and potentially costly) 
benefit to Medicare will place a further strain on the Medicare 
program. Congress should not let this opportunity pass without a 
serious discussion on how to deal with the long-range financial 
solvency of Medicare.

    Mr. Bilirakis. Thank you very much, Ms. McCall.
    Dr. Young?

                    STATEMENT OF DONALD YOUNG

    Mr. Young. Thank you, Mr. Chairman. The Health Insurance 
Association of America shares the concerns of many of you in 
Congress, calling for measures to help seniors better afford 
prescription drugs. We stand ready to work with Members of 
Congress of both parties and with the administration to help 
make senior prescription drug coverage a reality for all of our 
Nation's seniors.
    We believe something can and should be done in the near 
term to help seniors, but short-term solutions should not 
disrupt current private coverage that seniors depend upon or 
impede more fundamental Medicare restructuring and reform in 
the future. Some of the proposals that have been offered would 
do much more harm than good.
    Proposals that seek to provide coverage through stand-
alone, drug-only insurance policies simply would not work in 
practice. Their proponents have ignored the realities of the 
insurance market and based their supporting analyses on 
unrealistic assumptions. Designing a theoretical drug coverage 
model does not guarantee that private insurers will develop 
that product or that beneficiaries would purchase it.
    Some of the problems include high market entry costs; 
difficulty in pricing premiums for a volatile and continuing, 
ever cost escalating benefit; adverse selection, since drug use 
is frequently predictable; and significant regulatory hurdles 
at the Federal and State levels.
    I want to stress also that high deductible products are not 
a solution. The experience is clear that this is not an 
approach that is popular with seniors. Since these are not 
likely to be accepted by seniors, they are not likely to be 
offered by insurers.
    Similarly, attempting to assure coverage by mandating that 
private Medigap plans provide enhanced coverage for 
pharmaceuticals would result in unsustainable premium increases 
and reduced coverage. Our analysis indicates that Medigap 
premiums would jump by anywhere from 50 to 100 percent as a 
result of this type of mandate. Remember, Medigap drug coverage 
plans are available now, but only 13 percent of those choosing 
Medigap enroll in such plans, largely due to their added 
expense.
    In conclusion, any new policy proposal must be carefully 
examined to ensure that unintended consequences do not erode 
the private coverage options that beneficiaries rely on today 
to meet their health care needs. Survey after survey shows that 
beneficiaries are overwhelmingly satisfied with their Medigap 
coverage. As you consider options to help seniors with ever-
escalating drug costs, don't destroy the product they rely on 
for peace of mind and financial protection. There are other 
workable solutions.
    Thank you.
    [The prepared statement of Donald Young follows:]
Prepared Statement of Donald Young, Chief Operating Officer and Medical 
           Director, Health Insurance Association of America
                              introduction
    Mr. Chairman, distinguished members of the Subcommittee, I am Dr. 
Donald Young, Chief Operating Officer and Medical Director of the 
Health Insurance Association of America (HIAA). Prior to joining HIAA, 
I served for 14 years as Executive Director of the Prospective Payment 
Assessment Commission (PROPAC) where I was responsible for research, 
analysis, and the development of recommendations to the Congress and 
the Secretary of Health and Human Services on a wide range of Medicare 
policies. I also have served as Deputy Director of the Policy Bureau at 
the Health Care Financing Administration and as Medical Director for 
the American Lung Association. I began my career as a practicing 
physician in California.
    I am very pleased to be here today to speak with you about how best 
to increase access to affordable prescription drugs for our nation's 
seniors.
     seniors should have expanded access to needed pharmaceuticals
    As we all know, pharmaceuticals have become a critical component of 
modern medicine. Prescription drugs play a crucial role in improving 
the lives and health of many patients, and new research breakthroughs 
in the coming years are likely to bring even greater improvements. With 
older Americans becoming an ever-increasing percentage of the overall 
United States population, the need for more medicines for this sector 
of the population is becoming equally urgent. There is continuing 
emphasis on new pharmaceuticals to treat diseases typically associated 
with aging. Over 600 new medicines to treat or prevent heart disease, 
stroke, cancer, and other debilitating diseases are currently under 
development. Medicines that already are available have played a central 
role in helping to cut death rates for chronic and acute conditions, 
allowing patients to lead longer, healthier lives. For example, over 
the past three decades, the death rate from atherosclerosis has 
declined 74 percent and deaths from ischemic heart disease have 
declined 62 percent, both due to the advent of beta blockers and ACE 
inhibitors. During this same period, death rates resulting from 
emphysema dropped 57 percent due to new treatments involving anti-
inflammatories and bronchodilators.
    These advances have not come without their price. Rapid cost 
increases are putting prescription drugs out of reach for many of our 
nation's seniors. Because of both increased utilization and cost, 
prescription drug spending has outpaced all other major categories of 
health spending over the past few years. For example, while hospital 
and physician services expenditures increased between 3 percent and 5 
percent annually from 1995 through 1999, prescription drug expenditures 
have increased at triple the rate, averaging between 10 and 14 percent. 
According to projections by the Health Care Financing Administration, 
prescription drug spending will grow at nearly 10 percent a year until 
2008, almost double the rate of spending on hospital and physician 
services.
    About two-thirds of seniors have some type of insurance coverage 
for pharmaceuticals--either through employer-sponsored retiree health 
plans, private Medicare+Choice plans, Medicaid or, in limited 
instances, individual Medicare Supplemental (Medigap) policies. But 
this coverage may be limited, and it is likely to decline over time as 
cost pressures mount for employers, insurers, and individual consumers. 
For example, recent surveys indicate that employers are contemplating 
several changes for their retiree health care plans over the next 
several years, including increasing premiums and cost-sharing (81 
percent of respondents to a 1999 Hewitt Associates survey sponsored by 
the Kaiser Family Foundation) and cutting back on prescription drug 
coverage (40 percent).
    Also, unrealistically low government payments to Medicare+Choice 
plans is having the effect of reducing drug coverage for many seniors 
enrolled in these plans.
    Increases in per capita payments on behalf of beneficiaries 
enrolled in Medicare+Choice plans from 1997 to 2003 are projected to be 
less than half of the expected increases during the same period for 
those individuals in the Medicare fee-for-service program. In fact, the 
President's Fiscal Year 2000 budget included projected five-year 
medical cost increases of 27 percent for the original Medicare fee-for-
service program and 50 percent increases for the Federal Employee 
Health Benefit Program, while Medicare+Choice payment increases during 
the same period will be held to less than 10 percent in many counties.
    In addition, most seniors live on fixed incomes and their 
purchasing power will continue to erode over time as drug expenditures 
increase more rapidly than their real income. In terms of current 
dollars, seniors' income has increased very little over the past ten 
years. From 1989 to 1998, the median income of households with a family 
head 65 years of age or older increased from $20,719 to $21, 589. This 
represents an increase in real income of less than 5 percent over the 
entire decade.
    HIAA shares the concerns of many public voices today calling for 
measures to help seniors better afford prescription drugs. We stand 
ready to work with members of Congress from both parties, and with the 
Administration, to help make prescription drug coverage a reality for 
all of our nation's seniors.
    While we all know that seniors need help, some of the proposals 
under consideration would fall short of the goal. In addition, the 
possible effects of any new policy proposal must be carefully examined 
to ensure that unintended consequences do not erode the private 
coverage options that beneficiaries rely on today to meet their health 
care needs. In fact, we are extremely troubled that some of the 
proposals before Congress would do just that.
    Some of the proposals we have examined that rely on ``stand-alone'' 
drug-only insurance policies simply would not work in practice; their 
proponents have, quite simply, promoted a fiction by ignoring the 
realities of the insurance market and basing their supporting analyses 
on unrealistic assumptions. Others have proposed to assure seniors drug 
coverage by mandating that private health plans--either Medigap or 
Medicare+Choice, or both--provide enhanced coverage for 
pharmaceuticals. While this option has the virtue of being virtually 
cost-free from a federal budgetary standpoint, it would be far from 
inexpensive for seniors who, according to our estimates, would 
experience premium increases for Medigap products of between 50 and 100 
percent. It also would result in many seniors dropping the supplemental 
coverage they depend upon, creating a whole new set of political 
problems.
    My concern about these two policy options can be summed up in two 
statements:

 First, designing a theoretical drug coverage model through 
        legislative language does not guarantee that private insurers 
        will develop that product in the market.
 Second, if coverage that consumers cannot afford is mandated, 
        the result will be unsustainable premium increases, limited 
        choice, and reduced coverage.
    It is simply not good policy (or politics) for Congress, as well 
intentioned as it may be, to enact legislation that will result in 
seniors not being able to purchase today's extremely popular and very 
successful Medigap coverage.
           hiaa has developed a solution to help all seniors
    Before I elaborate on these concerns, let me first make clear that 
HIAA believes strongly that the status quo is unacceptable. Last year, 
HIAA's Board of Directors approved a three-pronged proposal developed 
by our member companies that would help all seniors. The HIAA program 
would: (1) help lower-income seniors through drug assistance programs; 
(2) provide a tax credit to help offset out-of-pocket drug costs for 
all other seniors; and (3) ensure fair payments to private 
Medicare+Choice plans that are struggling to provide prescription drug 
coverage for seniors despite unrealistically low government payments 
that will not keep pace with medical inflation and the projected 
increases in drug costs. I will not discuss the details of HIAA's 
proposal today. We have shared our plan with all members of Congress 
and we would be happy to discuss it with you in more detail at any 
time, or to respond to questions about it following my formal 
testimony. Let me just say that the HIAA proposal represents an 
immediate and workable step that will provide meaningful relief for all 
seniors, while avoiding the disruption and confusion for beneficiaries 
that surely would result were Congress to make changes in seniors' 
private benefit options before addressing needed changes in the 
underlying Medicare program.
    My testimony today will focus primarily on the reasons why we 
believe that relying entirely on private insurance models as a way to 
provide drug coverage to seniors is unsound--particularly without 
significantly restructuring Medicare. First, I will outline HIAA's 
concerns with stand-alone ``drug-only'' insurance plans for seniors. I 
will then elaborate on why we so strongly oppose drug coverage mandates 
on private insurance products.
      why a ``drug-only'' benefit is an empty promise for seniors
    Some have proposed that most seniors' drug coverage needs could be 
met by authorizing the creation of several new private insurance 
coverage options. Theoretically, these ``drug-only'' policies would be 
offered either as stand-alone policies, or sold in conjunction with 
existing Medigap coverage.
    Developing a legislative prototype based on a set of theoretical 
constructs does not guarantee that the market will respond by creating 
a private insurance product. Creating a new form of insurance is not 
easy. As with any new product, start-up efforts are costly and time-
consuming. Adding to the difficulty is that such insurance policies 
would have to meet existing (and possibly new) state and federal 
requirements before they could be sold. Thus, before making its entry 
into the marketplace, a ``drug-only'' policy would have to clear a 
multitude of economic and regulatory hurdles. Our members have told us 
that it is unlikely to do so.
Economic Barriers and Adverse Selection Problems
    Insurance carriers attempting to bring this type of product to 
market would face many barriers, including the costs of development, 
marketing, and administration. Premiums for the policy would have to 
reflect these costs. Adding to these administrative expenses is the 
inherent difficulty of developing a sustainable premium structure for a 
benefit that is so widely used and for which costs are rising so 
dramatically.
    Volatility in pharmaceutical cost trends also will make a stand-
alone ``drug-only'' policy difficult to price. While there has been 
relative stability in the rate of increase of hospital and physician 
costs during the past two decades, pharmaceutical costs have been more 
difficult to predict. In March 1999, for example, HCFA estimated that 
prescription drug expenditures would reach $171 billion by 2007. Just 
six months later, in September, HCFA was forced to revise these 
projections and now predicts that prescription drug spending will reach 
$223 billion by 2007, a 30 percent increase over the previous estimate. 
Since the Administration first offered its Medicare drug benefit 
proposal just last year, it has had to revise cost estimates for the 
program upward by more than 30 percent due largely to greater-than-
expected increases in the costs of prescription drugs.
    For many reasons, ``drug-only'' policies would be very expensive to 
administer. Adding to the economic liabilities of these policies, 
therefore, are the expense margin limitations insurance carriers must 
meet under OBRA ``90, which are likely to be too small to support 
separate administration of drug benefits.
    The most difficult factor driving up premiums, however, will be 
``adverse selection.'' Adverse selection occurs because those who 
expect to receive the most in benefits from the policy will purchase it 
immediately, while those who expect to have few claims will forgo 
purchasing it. When people with low drug costs choose not to enroll in 
coverage while those with high costs do enroll, insurance carriers are 
forced to charge higher premiums to all policyholders. The more 
opportunities there are for enrollment, the greater the risk of adverse 
selection.
    Adverse selection would be a very real problem for this type of 
product. Projections indicate that one-third of seniors (even if all 
had coverage for outpatient prescription drugs) will have drug costs 
under $250 in the year 2000, with the average cost estimated at $68. 
These seniors are unlikely to purchase any type of private drug 
coverage, given that the additional premium for such a policy would be 
at least 10 times higher than their average annual drug costs. Of the 
two-thirds who might buy the coverage, many would be doing little more 
than dollar trading. Some may actually end up much worse off: a person 
with $500 of drug expenses could have premium, deductible, and 
coinsurance costs equal to over 200 percent of the actual costs of 
drugs. Consequently, many seniors are not likely to purchase the 
product, resulting in further premium increases for those that do.
    Limiting the sale of these policies to the first six months of 
Medicare eligibility would help in theory only, given legislators' 
demonstrated proclivity to expand on ``guaranteed issue.'' The Clinton 
Administration's Medicare drug coverage proposal seeks to avoid adverse 
selection by limiting enrollment in a government-provided drug coverage 
plan to the first six months when beneficiaries initially become 
eligible for Medicare. While this type of rule theoretically helps, the 
concept seldom works in practice because legislators and regulators 
expand guaranteed issue opportunities over time in response to 
political pressure. For example, the ``first time'' guaranteed issue 
rule originally in place for Medigap policies has been greatly expanded 
over time--both through new federal rules in the Balanced Budget Act of 
1997 (BBA) and through state law expansions.
Regulatory Hurdles
    Even if such insurance policies were economically feasible, they 
would face significant regulatory barriers. The National Association of 
Insurance Commissioners (NAIC) would likely have to develop standards 
for the new policies; state regulators would have to approve the 
products before they could be sold, as well as scrutinize their initial 
rates and any proposed rate increases. Even relatively straightforward 
product changes based on proven design formulas can take several years 
to progress from the design stage through the regulatory approval 
process and, finally, to market.
    Because insurers would be required to renew coverage for all 
policyholders (as they are required to do with Medigap products), 
policies could not be cancelled if new alternatives were authorized by 
subsequent legislation or regulations. This would exacerbate adverse 
selection problems for these plans, since people with the greatest drug 
needs would retain them while others may seek out less costly 
alternatives. It also would dampen interest in offering the product in 
the first place, as insurers would be locked into offering these 
policies once they were issued.
    Guaranteed renewability also would exacerbate pricing problems for 
these ``drug-only'' products. While many in Congress have said that 
they oppose government price controls for pharmaceuticals, private 
insurers offering ``drug-only'' coverage are sure to face premium price 
restrictions on their products at the state level (all states have 
adopted either rate bands, modified community rating, or full community 
rating for Medigap as well as medical insurance coverage options 
available to non-seniors). Even when proposed premium increases are 
consistent with state law parameters, state regulators are likely to be 
resistant to the magnitude of increase it would likely take to sustain 
a ``drug-only'' insurance policy as drug prices grow over time.
    If the NAIC did standardize these policies, as some have proposed, 
it could impose unworkable limitations on insurers. If insurance 
carriers were prevented from adjusting co-payments and deductibles as 
drug costs continue to skyrocket, effective cost management would not 
be possible without significant premium increases over time. On the 
other hand, allowing needed flexibility would destroy the 
standardization of Medigap that Congress and the NAIC have worked so 
hard to achieve during the past decade.
High-Deductible Options Introduce Additional Practical Limitations
    Various suggestions have been made to render these policies 
economically viable. One suggestion that flies in the face of 
historical reality is to design the policies with very high 
deductibles--a feature that has never been popular with seniors. 
Comprehensive high-deductible Medicare+Choice medical savings account 
plans authorized under the Balanced Budget Act of 1997 (BBA) are not 
available because no company believes it can develop sufficient market 
size to make it worth the effort. It is also notable that no carrier 
has attempted to develop or market the two higher deductible Medigap 
policies authorized under the BBA, largely out of the knowledge that 
this product would not be attractive to a large enough block of seniors 
to make it viable. The $1,500 deductible in those BBA Medigap policies 
is considerably lower than some of the deductible levels proposed by 
advocates of the new drug-only policies.
    In short, a ``drug-only'' policy is an empty promise: it sounds 
good but it cannot succeed in the real world.
               a medigap drug mandate also is a bad idea
    Another bad idea is mandating drug coverage for Medicare 
supplemental insurance. (More than 20 million Medicare beneficiaries 
have such coverage, with 9 million policies purchased individually and 
11 million through the group market.)
    HIAA is strongly opposed to proposals that would require Medicare 
supplemental insurance or Medicare+Choice plans to cover the costs of 
outpatient prescription drugs without the addition of prescription drug 
coverage as a Medicare covered benefit. The growing cost of 
pharmaceuticals would force plans with mandated drug coverage to raise 
premiums or enrollee cost-sharing or reduce other benefits, all of 
which would be counterproductive as seniors dropped their supplemental 
or Medicare+Choice coverage. Mandated drug coverage also could lead to 
overly-restrictive government restrictions on private plans, such as 
prohibitions on the use of formularies or mandating certain levels of 
coinsurance.
    Today's Medigap marketplace is convenient and flexible, offering 
many choices to seniors. Of the 10 standard Medigap policies (A through 
J) sold, three (H, I, and J) provide varying levels of coverage for 
outpatient prescription drugs. Only a relatively small number of 
seniors (about four million) are willing to pay the additional 
premiums.
    Several studies show that adding a drug benefit to Medigap plans 
that currently do not include such coverage would increase premiums 
dramatically. Seniors who today have chosen to purchase Medigap 
policies that do not provide a drug benefit would end up paying $600 
more a year (assuming a $250 deductible for the policy), according to 
HIAA estimates.
    And if Congress were to require more comprehensive drug coverage, 
those premiums could double. According to a May 1999 study by HIAA and 
the Blue Cross Blue Shield Association, requiring that all Medigap 
plans include coverage for outpatient prescription drugs would raise 
Medigap premiums by roughly $1,200 per year, an increase of over 100 
percent.
    Premium increases of 50 to 100 percent would result in many seniors 
dropping their Medigap coverage, leaving them without protection 
against the high out-of-pocket costs of the hospital and physician 
services not covered by Medicare. Moreover, increases of this magnitude 
would discourage employers (who are also purchasers of supplemental 
coverage) from offering such a benefit at all.
    It is doubtful, then, that requiring all Medigap policies to 
include a drug benefit would be popular with seniors--who would 
experience diminished choice of policies, higher prices, and in some 
cases, loss of coverage.
                               conclusion
    The plight of seniors who are struggling to make ends meet and are 
finding it difficult to pay for medicine is very real. But the 
immediacy of the problem should not lead to short-term fixes that would 
do much more harm than good. We believe Congress should step back and 
examine a broad range of proposals--such as financial support for low-
income seniors, tax credits, and fair payments to Medicare+Choice 
plans, most of which offer drug benefits. We believe there are workable 
solutions that can meet the needs of our seniors without undermining 
the coverage they currently rely upon. HIAA stands ready to work with 
the members of this Subcommittee, and all in Congress and the 
Administration, to ensure that all seniors to have access to affordable 
prescription drugs.

    Mr. Bilirakis. Thank you, Dr. Young.
    Ms. Alecxih, you heard the comments by Dr. Young, his most 
recent comments regarding Medigap insurance. Do you agree with 
them?
    Ms. Alecxih. In terms of ``don't mess with Medigap''?
    Mr. Bilirakis. In terms of the numbers of seniors or 
beneficiaries who have Medigap and the reasons why they don't 
carry the drug----
    Ms. Alecxih. I don't think there is any direct evidence of 
reasons why they don't carry it. I do know after the 6-month 
open enrollment period, that there are only like two companies 
in the Blue Cross-Blue Shield selected States that don't use 
health status as a screen for whether or not you can gain that 
coverage at a future time, you know, after your open 
enrollment. So I don't know if it is just a choice based on 
premium or if it might also be not being able to gain access 
because they are underwritten out.
    Mr. Bilirakis. All right. Now, Dr. Young mentioned, of 
course, the expense involved to seniors in terms of a Medigap 
policy which would include drug coverage. Notwithstanding that, 
if all Medigap insurance policies included drug coverage or if 
all seniors who have Medigap were to use the Medigap policies 
that include drug coverage, how many more, in terms of 
percentage, seniors now not covered by prescription drug 
coverage would be covered, would you say?
    Ms. Alecxih. Well, I think you have an issue----
    Mr. Bilirakis. How much does that close that gap, in other 
words, of 20, 30 percent, whatever it is?
    Ms. Alecxih. About 15--well, about 30 percent of people who 
have supplemental coverage get it from Medigap, and probably 
about 20 percent of those then have drug coverage, and that 
is--you said 13 percent.
    Mr. Bilirakis. We get 13 percent.
    Ms. Alecxih. You get 13 percent. MCBS gets 42 percent. So 
pick a number in the middle for now. So if you say 20 percent 
of 30 percent, you have got somewhere in the neighborhood of 6 
percent, but that is assuming all of them keep the coverage.
    Mr. Bilirakis. So if all of them, if all of the Medigap 
policy holders had policies, Medigap policies that offer 
prescription drug insurance, you would raise that 69 to 70 
percent figure of seniors who have prescription drug coverage 
by, what, 6 percent, another 6 percent? Is that what we are 
saying?
    Ms. Alecxih. Probably, yes, 76, 77, assuming that everybody 
who has Medigap continues to have a Medigap policy and that you 
haven't priced them out of the market.
    Mr. Bilirakis. Yes. Right, right.
    Dr. Young, in your written statement you indicated, and I 
am just quoting from that written statement, that stand-along, 
drug-only insurance policies simply would not work in practice, 
and that their proponents have promoted a fiction by ignoring 
the realities of the insurance market, and of course you 
expanded upon this here orally a moment ago. But expand upon 
that, will you? Explain your reasoning, why you feel that that 
is the case.
    Mr. Young. If you move to an added benefit, drug benefit, 
you are going to increase the cost, and the people that look at 
that and say, ``Does that cost more than what my drugs cost out 
of pocket?'' and a substantial share are going to say yes. Why 
should I buy that? That is more costly to me than my drugs are 
costly.
    Mr. Bilirakis. Then what you are saying is that 
prescription drug only coverage would not work?
    Mr. Young. That is correct. That is absolutely correct.
    Mr. Bilirakis. Are we saying that the insurance companies 
would not offer those policies, they would not be available, or 
they would be available but be too expensive to be used?
    Mr. Young. It is entirely possible that there would be a 
small number of companies that would offer them, and it is 
possible that there would be a small number of beneficiaries 
that would buy them, but the only people that would buy them 
are in the high income category group, so that it is not a 
solution that has any practical value across the great majority 
of the Medicare population.
    Mr. Bilirakis. Disagreements? Ms. McCall? Or agreements, 
whatever? Do you have any feeling on that.
    Ms. McCall. To add to a couple of comments, I think some 
things to consider, there was a lot of good discussion this 
morning about the ultimate goal that we want to achieve and how 
quickly we could do things and how perhaps it may need to be 
phased. But if the ultimate goal is to integrate a coverage or 
a set of coverages for hospital, physician and ultimately 
pharmacy coverage, that moving toward a stand-alone perhaps is 
not a step in that direction, No. 1; and would that in fact be 
a universal access type program?
    Point No. 2, there may be some unintended consequences. 
When you have a more integrated approach with pharmacy and 
medical, there are medical directors who will tell you that it 
is very, very important to pay for particular drugs that could 
be very high in cost, and yet what you gain, you gain for not 
only quality of care but for cost somewhere else in the care 
equation. So how companies offering drug-only coverage would 
approach utilization management, it would be fundamentally 
different in some respects, and you would have to be careful 
with that.
    Mr. Bilirakis. Well, my time is up. Mr. Moran, if you have 
something real quick.
    Mr. Moran. I just wanted to comment briefly, perhaps, while 
agreeing with everyone that comprehensive coverage is obviously 
a superior vehicle to deliver these drug benefits, for all the 
reasons we have just described, I have a slightly different 
view, though I reach some of the same places that Don does on 
the individual coverage. Perhaps we could come back to that in 
another question, if that is timely from your perspective.
    Mr. Bilirakis. Ms. Alecxih, do you have anything to add to 
that?
    Ms. Alecxih. No, thank you.
    Mr. Bilirakis. Thank you. Mr. Waxman?
    Mr. Waxman. Well, that is an interesting point that you 
have all seemed to concur in, that stand-alone policies for 
drugs only doesn't appear to be a viable way for us to go to 
cover people. Does anybody disagree with that, on this panel? 
Mr. Moran?
    Mr. Moran. Yes, Mr. Waxman. While not completely 
disagreeing with it, from the standpoint that clearly I join my 
colleagues in suggesting that comprehensive coverage is 
superior as a mechanism for delivering a drug benefit, for all 
the reasons we have described, if comprehensive reform is not 
in the offing, and the question is not whether or not you are 
going to go forward with an interim benefit but what form of 
interim benefit you are going to go forward with, then the 
analytical framework might shift a little bit and you might get 
a slightly different answer from some of us than the one you 
have gotten up until now.
    Mr. Moran. Well, give me an example of a benefit that would 
be limited so that it might induce insurers to want to cover 
prescription drugs?
    Mr. Moran. Let me offer you, without trying to speak for 
Don and his industry, a couple of insights. One is that in a 
purely voluntary market where no one received any degree of 
financial support for participation, you would have more 
concern about that than you would in a market where, as many 
people are discussing in a variety of proposals, a substantial 
number of people, without regard to their drug health risk, who 
are going to be offered a fairly substantial degree of 
subsidies to participate. To the extent that is in fact the 
case, you could have a viable private market wrapped around 
that degree of participation without too heavy concerns about 
the kind of selection effects that people are worried about.
    I think a second area of concern is that if there are 
expedients that could dampen the risk faced by insurers through 
a variety of mechanisms, public or private, that might also 
have a mitigating effect.
    And, at the end of the day, I think you have to understand 
that the context of some of the insurance industry's concern is 
not just what Washington will do but how a freestanding drug 
benefit would play out vis-a-vis the existing State regulatory 
structures, because, as you recall, Medigap policies are now 
price regulated in virtually every State in the country at the 
individual market level. And if I were an insurer valuating a 
private market, I might be very concerned that I could go into 
a Federal scheme that seemed to be well balanced and 
reasonable, and then get stuck with totally unrealistic price 
regulation at the State level going forward.
    So there is a lot of work to do to get to a workable 
policy, and I don't mean to pretend that it is simple, but I am 
not--I am trying to maybe offer you an existing proof that it 
is perhaps not impossible.
    Mr. Waxman. It sounds like, and I want to hear Dr. Young's 
view, but it sounds like you are saying if it is heavily 
subsidized, maybe someone will offer it, if you relieved them 
of regulatory responsibility at the State level and limited the 
benefit.
    Mr. Young. Thank you, sir. That is a very good summary.
    Mr. Moran. I would probably go, having been invited to talk 
to you about the wonders of stop-loss, I would probably have to 
advocate that in this context, as well. I think you could offer 
a benefit in the private market context focused on the highest 
market cost drugs without worry about severe selection effect.
    Mr. Waxman. How would you get any kind of cost containment 
under this kind of a scheme? Any of you have any ideas of that?
    Mr. Young. In terms of the current Medigap market, while 
there is not a lot of people in it, there is the ability to get 
price discounts. The Medigap carriers that do write this and 
the people that do buy it are pointed toward places where they 
can buy, mail order houses, other sites, so they get some price 
discounts. They don't have the care management piece but they 
do have the pricing discounts.
    Mr. Waxman. Is that our most efficient way to get the price 
discounts and to integrate a prescription drug benefit with the 
other health care needs? Ms. McCall, you spoke to that point a 
bit.
    Ms. McCall. I apologize. Is which way the most efficient 
way?
    Mr. Waxman. Well, if you get a Medigap policy that covers 
prescriptions, which is heavily subsidized but has a limited 
prescription benefit, now it is going to pay for some drugs, 
and I asked whether there can be cost containment. In Dr. 
Young's view, he thinks that there could be cost containment 
because they are a larger purchaser, but are we really going to 
get the benefit of the maximum cost containment that we could 
get in a reasonable fashion, and integrate the benefit with 
other health care services?
    Ms. McCall. It would be more difficult in that type of 
design. I will go back to what my colleagues stated in 
discussions about stop-loss. You can have very high stop-loss, 
but you have to look at what----
    Mr. Waxman. I wasn't talking about stop-loss. I was just 
talking about the benefit itself.
    Ms. McCall. Correct.
    Mr. Waxman. Because the fact of the matter is, of all the 
demographic groups, seniors are charged the highest for 
prescription drugs, and this is true because so many seniors 
don't benefit from being a large purchaser with the ability to 
get discounts on drugs. So I don't think the experience has 
been, Dr. Young has argued there is some contrary evidence, but 
I don't think it has been true that under the Medigap plans you 
get a large amount of discounted drugs. I think most of the 
time you purchase drugs at retail prices and the Medigap policy 
pays for it. Do you think the Medigap approach is going to be a 
way to get leverage?
    Ms. McCall. I believe that we can get cost containment 
through lower prices through that mechanism. I have much less 
experience with Medigap. However, the limited Medigap business 
that Humana had, we were able to obtain the on-line 
adjudication and the discounts for the enrollees that we did 
have in our Medigap policies, so I believe that those 
mechanisms could be used to obtain the type of cost containment 
you are talking about.
    Mr. Moran. I guess if I might, Mr. Waxman, just supplement 
that slightly, it really depends, to be direct about answering 
your question, on what your standard of efficiency is. If your 
standard of efficiency is the lowest unit prices for a 
particular class of drugs, then it really depends on the 
benefit design. I mean, the challenges, most of the benefit 
designs we have seen brought forward in this debate are really 
not insurance; they are just a form of installment financing 
for whatever purchases people were going to make anyway.
    Mr. Waxman. There is not much cost containment in that.
    Mr. Moran. No. Well, certainly heavy front end dollar 
benefit structures capped at $500 or $1,000 or something like 
that have actuary values very close to $500 or $1,000. I mean, 
people are basically buying a sure way of paying for that 
throughout the year. If that is your policy, then you can argue 
whether price controls are more efficient than competing 
private markets, that kind of stuff, but that doesn't give you 
a lot of policy traction.
    If, on the other hand, your policy is insurance, then 
trying to create a market that stimulates an environment where 
people can get coverage, and I think a private market could 
actually be a fairly efficient way of bringing about fairly 
higher end catastrophic--well, I guess we weren't supposed to 
say the ``c'' word, were we, Mr. Chairman?
    Mr. Waxman. If catastrophic coverage were the goal.
    Mr. Moran. If that were the primary essence of where you 
were going, then a private market could be very efficient at 
bringing you that.
    Mr. Waxman. I see my time is up.
    Mr. Bilirakis. Dr. Ganske?
    Mr. Ganske. Well, Mr. Chairman, I just have to keep going 
back to lessons that Congress should have learned from 1988 on 
this. Mr. Burr had a series of questions for the previous 
panel, and I think this panel was in the room at the time, and 
it was basically along the lines that under the 
administration's plan, for instance, which still costs about 
$170 billion, a sizable percentage of the beneficiaries would 
end up paying more rather than less in their current situation, 
because maybe they don't need that much in terms of a pharmacy 
benefit.
    This in fact is what happened in 1988. That wasn't a 
voluntary program. That was across the board. And so if you 
look at the surveys from that time, you found that the senior 
citizens were about evenly split. About 50 percent thought that 
that catastrophic plan was good, and about 50 percent were 
vehemently against it because it raised their premiums, and 
they also had some means testing in there, the same thing that, 
you know, the administration is proposing.
    And it goes back to what Mr. Rostenkowski said was, tongue 
in cheek, a mistake that they made when Congress designed that 
program at that time. He said we adopted a principle 
universally accepted in the private insurance industry: People 
pay premiums today for benefits they may receive tomorrow. But 
the fact is, if you have a voluntary program and if somebody 
looks at it and says, ``You know, I don't need that much right 
now. I don't think I'll get into paying more premiums right 
now. I'll just wait until I get a little sicker and I need 
higher premiums,'' then you have distorted that risk pool 
significantly.
    So it looks to me like, you know, the administration is 
trying to get around the problem that they had in 1988 by 
saying, ``Well, now we are just going to be voluntary,'' but 
then they come up with this 80 percent participation that I 
just can't see with the way the numbers are. And it gets us 
back to, well, if you put enough Federal dollars into this 
benefit so that the seniors have to pay almost nothing for 
this, and you are now just talking about a $10 premium 
increase, well, then, yes, then you may be able to get enough 
participation, and of course the seniors would love that. But 
that is why the Clinton administration didn't design it that 
way, because they have already, under the way they have done 
it, come up with about a $170 billion plan.
    Now, is my analysis correct?
    Mr. Young. Your analysis, from the point of view of drug-
only Medigap, is exactly on the mark. That is our point 
exactly. That is why a drug-only insurance, private insurance 
solution is not a solution at all. It is not going to work. You 
are right on the mark.
    Mr. Moran. At the risk of sounding like a broken record, I 
guess I would say that the critique there is not so much the 
label you put on it but the fact that once again the policy you 
are characterizing is one that is very heavily oriented, with 
very heavy front end benefits, with very low caps. In an 
environment where you are doing that, all you are doing is 
taking money out of people's pockets and then handing it back 
to them in some different fashion than what they collected it, 
and of course you can find a whole variety of circumstances 
under which some people get more, some people get less, in 
often seemingly random fashion, without making any sense of it.
    Mr. Ganske. Correct me if I am wrong. We have got several 
actuaries on this panel, and everyone is well versed in what is 
going on, but it looks to me like, you know, we have seen some 
significant HMO premium increases, not in Medicare but across 
the board. Isn't a large percentage of that related to the 
significantly escalating pharmacy benefit cost?
    Mr. Young. Absolutely. Drug, pharmacy costs are by far the 
fastest growing component, 16 percent and in some cases even 
more a year, and becoming a substantial part of the overall 
funding.
    Mr. Ganske. And, Mr. Moran, I think you alluded to the fact 
that we have got some drugs coming on line here that could be 
hugely expensive. I mean, we are talking about gene therapies. 
We are talking about, I believe that we will see in my lifetime 
a type of protein breakdown inhibitor that could affect the 
ends of the chromosomes, which would be an anti-aging type of 
medication. Now, you know, a drug company will have the patent 
for that. I think that that is going to be very, very 
expensive. That could bump you right into that catastrophic 
limit, even if it is very high, if you start out with something 
at $6,000, $7,000. Is that not right?
    Mr. Moran. I think the point I was trying to make earlier 
is that it depends on what your policy concern is. If your 
policy concern is in fact about making certain that all 
Medicare beneficiaries have access to the highest cost products 
as they become available on the market, to the extent they are 
therapeutically indicated, then you have to go in the direction 
of a stop-loss type of policy because no other type of policy 
is going to get you there.
    Indeed, perhaps the analogy that might resonate is that, 
let's suppose that within 3 years we announced that some 
biotechnology company had discovered a cure for Type I diabetes 
that constituted a 6-months course of a biological that cost 
$75,000 a year to manufacture. How long would this subcommittee 
be able to avoid hearings on that subject, and what would you 
do with it, if it came about?
    Mr. Ganske. There you go.
    Mr. Moran. You would either have a stop-loss policy already 
in place as a policy response to that eventuality, or you would 
be authorizing that program in the coming months, in the same 
way that you have authorized programs for the treatment of end 
stage renal disease and other areas where there were 
definitive, kind of ``nail it'' treatments brought forward, 
regardless of the price.
    So, I mean, to me that is the challenge in all of these 
issues, is on the one hand we can say that we are dealing with 
this from the context of the existing structure of drug benefit 
programs and we know what to do, but the policy challenge is 
right over the horizon looking at us.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Barrett?
    Mr. Barrett. Thank you, Mr. Chairman. I apologize for not 
being here for the testimony, so my questions might not 
particularly be on the mark or might seem naive, but the first 
comment and question I have is, one of the parts of the debate 
that we hear, one of the points we hear with regard to trying 
to control the cost of prescription drugs is, whether it is 
with a market type of approach, or some would argue that it is 
price controls, is it would inhibit innovation, it would 
inhibit any type of explorations.
    Do you find that the current laws with regard to Medicare, 
because Medicare obviously covers virtually everything except 
prescription drugs, have they in any way inhibited research or 
innovation in other areas of health care? And just go down the 
line, just to get your opinion on that.
    Mr. Young. That would be a very difficult question to 
answer definitively, as that is a cause and an effect. I don't 
have any information that says that there is evidence that you 
have impeded innovation. I think you can argue in a number of 
cases that Medicare's payment policies have in fact provided 
fuel that has fostered some innovation, by putting more money 
in the health care system overall, but I am not sure how anyone 
would ever draw the conclusion with any degree of certainty 
that you are asking.
    Ms. Alecxih. I think the set-asides within Medicare and the 
hospital PPS payment system for teaching hospitals, in and of 
itself, encourages innovation because that is where a lot of 
that stuff is going to occur on the medical procedure side. And 
so I don't--that is all I would have to offer on that point.
    Mr. Moran. I mean, in the intermediate and the longer term 
it is possible to take all kinds of different views about this. 
I guess my thinking on this is colored heavily by the fact that 
if you look out across the existing landscape, a lot of the 
really cutting edge stuff is being done now by smaller biotech 
companies rather than by large pharma companies, and virtually 
all of those are that the point--they are in a premarketing 
stage. They basically have no revenues, and they are 100 
percent dependent on venture capital in order to finance the 
next 6 to 9 months of operation.
    And I guess a concern I have is at some point, if you were 
to come forward with a serious prospect that there might be 
some active price intervention from Congress' standpoint, the 
venture capital would dry up for a large chunk of that, and if 
venture capital dries up for a large chunk of it, they don't 
make it through the year.
    Mr. Barrett. But have you seen any evidence of venture 
capital drying up for any other segment of the health care 
industry?
    Mr. Moran. I think you would have a difficult time 
financing any subacute fields this month, frankly. Yes, venture 
capital dries up in every area of health care where it turns 
out not to be a good idea on a retrospective basis. And so, I 
mean, that is the challenge in all of this.
    Mr. Barrett. Ms. McCall?
    Ms. McCall. I guess to add onto what Mr. Moran has just 
said, I have had the opportunity to negotiate with a number of 
manufacturers and have had to pay a lot of attention to 
formulary design, and I understand the challenges that pharma 
faces in terms of--not that I always like them, but I 
understand the challenges they face in terms of how long they 
have for a drug to be on market.
    Mr. Barrett. That is no my question.
    Ms. McCall. I understand.
    Mr. Barrett. My question is other areas of health care. I 
understand the argument that it is tabu, that we should never, 
ever mention any type of government intervention with----
    Ms. McCall. Sure. I do believe----
    Mr. Barrett. [continuing] with prescriptions, but it blows 
my mind when I see the commercials that say do you want 
government involved in your health care, and I am thinking the 
only part--talking to seniors, the only part that government is 
not involved in is prescription drugs, and everybody is happy 
with everything but that. So I am wondering what evidence there 
is that somehow government has screwed up innovation in other 
areas of health care because government is involved.
    Ms. McCall. The only evidence that I would see, and I don't 
think it is screwed up, is again in the subacute area where the 
issue is one of financing. Are we trying to actually finance 
something below the cost that it takes to deliver something? 
Once you reach that point and everybody recognizes it, there 
will not be an injection of capital into those areas.
    But I also believe that what is happening in the drug 
development area is so unlike what is happening in other areas 
of technological development, that it is at least different in 
degree, if not different in kind, in the types of development 
taking place.
    Mr. Barrett. Have any of you looked at the Tom Allen bill? 
I know that it is something that--and I was frankly a little 
disappointed when I looked at the committee memorandum and the 
different models for reform. It listed--I didn't see any 
mention at all of the Tom Allen bill, and I am just interested 
in your comments on that bill.
    Mr. Moran. The superficial policy is what it is. It states 
an intention to try to go toward what amounts to a unitary 
pricing structure or a voluntary--I mean, the challenge, 
whether or not you believe that as a matter of policy is a 
matter of taste, in my judgment. The question really is as to 
the administrative workability of it, and I guess my experience 
in these kind of things is, you won't know until you try it, 
and once you have tried it, you will find it is a lot more 
complex than you think it is.
    Mr. Young. The information that was presented by Mr. 
Greenwood I think showed price versus other factors driving up 
costs, and that price was a component but there were multiple 
other factors that were driving up drug spending costs, 
including utilization, mix of services, and things that were 
used. And so I think you have to be careful if you are focusing 
only on price, No. 1. And, No. 2, we have had a number of 
experiments in this country on price controls, and they 
generally have not worked well.
    Mr. Barrett. I am sorry. Do you believe that the Allen bill 
is price controls, I guess was my question.
    Mr. Young. Okay. Then we get into a matter of semantics. I 
don't know what kinds of words you want to use, but you are 
interfering with an exchange or you are intruding into an 
economic exchange, whether you want to talk about it as price 
controls or how you do it.
    And we do know, as one of the witnesses mentioned earlier, 
that the Medicaid system, whether you call that price controls, 
led to a change in the market. There is an action and a 
reaction to it. So I think you need to be very careful when you 
start getting involved in market transactions and rules and 
regulations.
    Mr. Barrett. One final question, just as a follow-up to 
that. I am of the belief that under the current system, that 
older people pay more because disproportionately they are not 
covered by health care plans. And Ms. McCall made reference 
earlier to unintended consequences. I guess my first question 
is, do you agree with my factual assertion that older people by 
and large are paying more? And, second, is that an intended 
consequence or an unintended consequence?
    Mr. Bilirakis. Brief responses, please.
    Mr. Young. It is a consequence of younger people tending to 
have insurance, and they buy insurance through the workplace 
and they are in some form of pharmacy benefit management, drug 
pricing. So they are getting a discount, and the seniors, the 
evidence seems to be overall, are paying more than those who 
are getting a discount through a large group.
    Mr. Barrett. So, is that an intended consequence or an 
unintended consequence of the current system?
    Mr. Young. No, I think that is an unintended consequence. I 
think the consequence was to give those who are negotiating in 
plans, and the plans moved forward, to get the discounts.
    Mr. Barrett. Okay. And I would yield back. My only, if I 
may----
    Mr. Bilirakis. You are well past your 5 minutes.
    Mr. Barrett. The fear of moving into these new systems is 
that there is unintended consequences. My point is, under the 
current system, as you have said, Dr. Young, there is an 
unintended consequence that I think hurts older people. And I 
would yield back the balance of my time.
    Mr. Young. If I could just add to it, there is a residual, 
and maybe we are getting into semantics about an unintended 
consequence or a residual effect. The fact that the seniors are 
playing may be a residual effect and not an unintended 
consequence.
    Mr. Bilirakis. Dr. Ganske, did you have anything further, 
another minute or 2? You are more than welcome.
    Mr. Ganske. No, thank you.
    Mr. Bilirakis. I have shocked you, haven't I?
    Well, you have waited for so very long, and we certainly 
appreciate it. By now, some of you have done this before and 
you know what it is like being on that third panel, which is 
always a terrible panel to be on. But we appreciate it so much.
    Now, there may be and quite often are questions from the 
members of the subcommittee staffs to you in writing, and I 
know you don't mind receiving those and responding to them, if 
you would. If there isn't anything further to come before this 
subcommittee, we will go ahead and adjourn and release you, and 
thank you again.
    [Whereupon, at 3:19 p.m., the subcommittee was adjourned.]

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